ANIMAL SPIRITS™ REPORT 3: APAC Country Outlook Summary

ANIMAL SPIRITS REPORT 2: APAC Valuation and Earnings Snapshot

ANIMAL SPIRITS REPORT 1: Macro Backdrop - Base Jumping the Fed with Oil and Inflation Expectations

APAC Investment Strategy, Animal Spirits Report, Quiddity Advisors

Paul M. Kitney, PhD

APAC Investment Strategy, Animal Spirits Report

Quiddity Advisors

Pan-Asia Catalysts/Events

Thematic (Sector/Industry)

Bangladesh Utilities / Thematic (Sector/Industry)

Investment Conclusions - Tactical View (3-6 Months)<div class="sk-insight-content__block"><ol><li>Animal Spirits has an "overweight" stance on Korean equities. Animal Spirits suggested weighting is 10 percent versus 8.1 percent, based on the MSCI Asia Pacific benchmark.</li><li>Our macro baseline scenario is positive on emerging markets (EM) in Q4, 2016. We see improvement in commodities demand-supply balances, a normalization of inflation expectations and a Fed that is prepared to run the US economy "hot" for longer to allow the former to develop. All of these are positive for EM.</li><li>We prefer currency-hedged exposure to Korea at a macro level for USD based asset allocators and investors in general. <a href="https://www.smartkarma.com/entities/23637" target="_blank" data-smartkarma-citation="entities:23637:1">IShares Currency Hedged MSCI South Korea ETF (HEWY US)</a> is a liquid, currency hedged ETF play on the MSCI Korea index. </li><li>In sectors, we are "overweight" financials, information technology and energy. We are "underweight" utilities, consumer staples and health care.</li><li>Our focus list of themes include a) yield-curve plays, focusing on banks and insurers, b) energy</li><li>Animal Spirits top picks are:  <a href="https://www.smartkarma.com/entities/6978" target="_blank" data-smartkarma-citation="entities:6978:1">Shinhan Financial Group Ltd (055550 KS)</a> , <a href="https://www.smartkarma.com/entities/12843" target="_blank" data-smartkarma-citation="entities:12843:1">Hana Financial Group (086790 KS)</a> , <a href="https://www.smartkarma.com/entities/3969" target="_blank" data-smartkarma-citation="entities:3969">Korea Gas Corporation (036460 KS) </a>and <a href="https://www.smartkarma.com/entities/16955" target="_blank" data-smartkarma-citation="entities:16955">Sk Hynix Inc (000660 KS)</a> </li></ol></div>Summary of Our Investment Thesis - "Overweight" Korea<ul><li>Valuation (positive) - The "Korea Discount" is clear across most measures except dividend yield. EV/EBITDA is our preferred valuation measure for Korea and the discount is 30-50 percent. Why is there a "Korea Discount"? Geopolitical risk and poor corporate governance. Geopolitical risk is worsening and corporate governance is not improving fast enough, despite rising payout ratios and activism such as Elliott and Samsung. Valuation percentiles don't sufficiently discount the tail event risk of current geopolitics. Our country evaluation matrix for Korea is modified to "positive" from "very positive" with respect to valuation.</li><li>Earnings (very positive) - Despite the earnings shocks from the Hanjin Shipping bankruptcy and the Samsung recall of the Note 7, earnings are defying the trade cycle downturn and earnings revisions are outperforming global and regional peers. Earnings outperformance is due largely to higher EBIT margins (and reducing financial leverage), driven by cost cutting and favorable Won-Dollar and Won-Yen cross currency effects. Animal Spirits upgrades earnings in our evaluation matrix to "very positive".</li><li>Economic Policy (neutral)  - Monetary and fiscal policy are likely on hold as inflation responds to the housing finance boom, Won weakness, US Fed policy normalization and the oil price base effect. The 2 percent BOK inflation target is in sight for Q2 2017 or possibly before, providing a limited scope for policy to exert influence.</li><li>Macro (negative) - How important is FX to Korean earnings? Both the Won-US Dollar rate and the Won-Yen rate are important but correlate very strongly with Korean earnings when they are in synch as they are now. Macroeconomic headwinds include the effect of stronger oil on the trade balance, RMB weakness and sharply rising household debt, while geopolitical risks loom.</li></ul>Country Equity Strategy Notes<a href="https://www.smartkarma.com/insights/animal-spirits-report-japan-equity-market-outlook-escaping-the-value-trap" target="_blank" data-smartkarma-citation="insights:5735">ANIMAL SPIRITS™ REPORT: Japan Equity Market Outlook - Escaping The Value Trap</a> <a href="https://www.smartkarma.com/insights/animal-spirits-report-greater-china-view-china-goldilocks-hk-revival-taiwan-bond-proxy" target="_blank" data-smartkarma-citation="insights:6041">ANIMAL SPIRITS™ REPORT: Greater China View - China “Goldilocks”, HK “Revival” &amp; Taiwan “Bond-Proxy”</a> <a href="https://www.smartkarma.com/insights/animal-spirits-report-india-equity-strategy-upgrade-to-overweight-as-patel-s-dovish-arm-twists" target="_blank" data-smartkarma-citation="insights:6268">ANIMAL SPIRITS™ REPORT: India Equity Strategy - Upgrade To Overweight as Patel’s Dovish Arm Twists</a>  A pdf version of this note is attached, including important disclaimers

Investment Conclusions - Tactical View (3-6 Months)Animal Spirits has an "overweight" stance on Korean equities. Animal Spirits suggested weighting is 10 percent versus 8.1 percent, based on the MSCI Asia Pacific benchmark.Our macro baseline scenario is positive on emerging markets (EM) in Q4, 2016. We see improvement in commodities demand-supply balances, a normalization of inflation expectations and a Fed that is prepared to run the US economy "hot" for longer to allow the former to develop. All of these are positive for EM.We prefer currency-hedged exposure to Korea at a macro level for USD based asset allocators and investors in general. IShares Currency Hedged MSCI South Korea ETF (HEWY US) is a liquid, currency hedged ETF play on the MSCI Korea index. In sectors, we are "overweight" financials, information technology and energy. We are "underweight" utilities, consumer staples and health care.Our focus list of themes include a) yield-curve plays, focusing on banks and insurers, b) energyAnimal Spirits top picks are:  Shinhan Financial Group Ltd (055550 KS) , Hana Financial Group (086790 KS) , Korea Gas Corporation (036460 KS) and Sk Hynix Inc (000660 KS) Summary of Our Investment Thesis - "Overweight" KoreaValuation (positive) - The "Korea Discount" is clear across most measures except dividend yield. EV/EBITDA is our preferred valuation measure for Korea and the discount is 30-50 percent. Why is there a "Korea Discount"? Geopolitical risk and poor corporate governance. Geopolitical risk is worsening and corporate governance is not improving fast enough, despite rising payout ratios and activism such as Elliott and Samsung. Valuation percentiles don't sufficiently discount the tail event risk of current geopolitics. Our country evaluation matrix for Korea is modified to "positive" from "very positive" with respect to valuation.Earnings (very positive) - Despite the earnings shocks from the Hanjin Shipping bankruptcy and the Samsung recall of the Note 7, earnings are defying the trade cycle downturn and earnings revisions are outperforming global and regional peers. Earnings outperformance is due largely to higher EBIT margins (and reducing financial leverage), driven by cost cutting and favorable Won-Dollar and Won-Yen cross currency effects. Animal Spirits upgrades earnings in our evaluation matrix to "very positive".Economic Policy (neutral)  - Monetary and fiscal policy are likely on hold as inflation responds to the housing finance boom, Won weakness, US Fed policy normalization and the oil price base effect. The 2 percent BOK inflation target is in sight for Q2 2017 or possibly before, providing a limited scope for policy to exert influence.Macro (negative) - How important is FX to Korean earnings? Both the Won-US Dollar rate and the Won-Yen rate are important but correlate very strongly with Korean earnings when they are in synch as they are now. Macroeconomic headwinds include the effect of stronger oil on the trade balance, RMB weakness and sharply rising household debt, while geopolitical risks loom.Country Equity Strategy NotesANIMAL SPIRITS™ REPORT: Japan Equity Market Outlook - Escaping The Value Trap ANIMAL SPIRITS™ REPORT: Greater China View - China “Goldilocks”, HK “Revival” &amp; Taiwan “Bond-Proxy” ANIMAL SPIRITS™ REPORT: India Equity Strategy - Upgrade To Overweight as Patel’s Dovish Arm Twists  A pdf version of this note is attached, including important disclaimers

Sumitomo Mitsui Financial Group (8316 JP)

Mitsubishi UFJ Financial (MUFG) (8306 JP)

China Communications Construction (1800 HK)

Sumitomo Mitsui Financial Group (Sponsored Adr) (SMFG US)

Sumitomo Mitsui Financial Group (Sponsored Adr)

NTT (Nippon Telegraph & Telephone) (9432 JP)

Shanghai Pudong Development Bank Co. (600000 CH)

Taiwan Semiconductor (TSMC) - ADR (TSM US)

Mitsubishi UFJ Financial (MUFG) ADR (MUFG US)

Samsung Electronics Pref Shares (005935 KS)

ANIMAL SPIRITS™ REPORT: Korea Equity Strategy - Overweight as Earnings Hit the Sweet Spot