Stocks rose following UK PM Theresa May’s decision to call a snap general election and a first round victory for French presidential candidates Emmanuel Macron and Marine Le Pen. However, risk appetite was fairly muted due to concerns surrounding North Korea’s bellicose actions and an apparent delay in the materialization of Trump’s growth policies. The MSCI Asia Ex-Japan Index returned 2.2% this month.
MSCI China gained 2.7% in April. Mainland bourses underperformed Hong Kong equities as the PBOC looks to tighten market liquidity to ebb financial risks. China’s 1Q17 GDP expanded 6.9%, turning out better than street expectations. Improving Sino-US relations surfaced after the US Treasury Secretary refrained from labelling China a currency manipulator, pulling back from a campaign promise of the US President. The Trump-Xi meeting at the Mar-A-Lago estate in Palm Beach, Florida was well received, as both leaders made pledges to improve trade and investment relations between the two nations.
MSCI India pared losses from a mid-month sell down, closing 0.9% higher. The Reserve Bank of India left its main lending rate unchanged at 6.25%, but raised the reverse report rate by 25 basis points to 6.0%. Signs that the credit cycle has bottomed out continue to act as a tailwind for equities while concerns over the implementation of the Goods and Services Tax (GST) in July have been assuaged given the strength in the economy and the rising popularity of PM Modi.
North Asian markets closed higher spurred on by the improving global growth outlook. MSCI Korea returned 2.8% as tech stocks rose on robust demand for internet-connected devices with tightened supply having pushed up prices for memory chips. South Korean equities were surprisingly resilient despite ongoing tensions with North Korea and the upcoming Presidential election in May. They rallied following the decision of a large conglomerate to cancel treasury shares, reflecting prospects of further reforms by other large corporates. MSCI Taiwan returned 1.5% over the month. Taiwan’s 1Q17 GDP rose 2.6% which was higher than consensus expectations.
Southeast Asian markets inched higher as the MSCI ASEAN index returned 1.7% over the month. MSCI Indonesia returned 3.1% after the gubernatorial victory for Anies Basewedan over the incumbent Basaki ‘Ahuk’ Pernawan. Stocks rallied as the second round vote was free of any violence and both candidates campaigned on similar platforms to lift the economy and reduce poverty. MSCI Malaysia rose 1.8%, with the ringgit gaining 1.9% on receding external funding pressure. MSCI Thailand fell 0.1%. Thailand’s new king approved the state charter, paving the way for a general election in 2018. MSCI Philippines gained 5.2%. MSCI Singapore dropped 0.1%.
Global markets continue to trade higher as sentiment appears confident that geopolitical risks emanating from the US and Europe will abate. The rising divergence between soft data (e.g. consumer confidence reports and business surveys) remains elevated as hard data (e.g. retail sales, loans demand) suggests that initial optimism has not yet translated into economic growth.
This scenario seems likely to continue into the near future. While the victory for Emmanuel Macron bodes positively that the populist wave is fading, France’s new President will in all probability face a divided Parliament. Republican control of both the White House and Congress has yet to advance much of President Trump’s agenda during his first 100days in office. Inconsistent policy messages including scant details of his actual tax plan proposals have done little to incentive a pickup in household demand. The preliminary reading of 1Q17 GDP echoes much of this disappointment.
Given this backdrop, there are good reasons to remain positive about Asian equities where regional economic data is encouraging and monetary policies supportive. A pickup in global trade has augured well for the Asian region, led by a recovery in commodity prices. While Trump’s decision to renege on some of his election promises has benefited trade flows, Asia is structurally moving away from full dependency on US markets given rising demand in developing countries.
The acceleration in China’s nominal GDP anchors Asian stability, as stronger data coming from the end of the three month period suggests that momentum is building into the second quarter. China’s 1Q17 came as a surprise given that Beijing is placing more emphasis on containing financial risks. Much of the rise stems from domestic demand, with consumption having contributed 77.2% to growth in the first quarter, compared to 64.6% a year earlier. The boost to nominal growth makes the problem of excess leverage more manageable.
In India, PM Modi’s popularity is unscathed allowing his BJP party to push forward its key policy agenda. Economic stabilization is flowing into corporate earnings, helping to attract foreign and domestic investors into capital markets. However, the outlook for the Indian economy appears more challenging, as the RBI plans to monitor asset quality to ensure the sustainability of the economic cycle. In April, the RBI unveiled new plans to require banks to hold more capital and enforce more stringent asset quality levels.
While geopolitical risks sit on the periphery, it is possible to take some solace with the evidence of fading nationalism with the populist tone becoming less strident. As mentioned in a previous monthly outlook, the silver lining in a divided US Congress and lethargic Brexit negotiation is the inability of populist groups to produce meaningful alternatives or solutions. However, policy signals remain mixed. Trump has demonstrated both a pro-trade stance (delaying a border wall with Mexico, pulling back on labelling China a currency manipulator, withdrawing his threat towards NAFTA) as well as his Pro-America rhetoric (pulling out of TPP, new tariffs on Canadian soft lumber and attacking the H-1B work visas).
Asian equity markets should continue to be attractive in this environment. Resilient domestic driven economies in China, India and ASEAN should offset any slowdown in trade should protectionist policies resurface, while South Korea and Taiwan continue to expand exports to EM. Asia’s political environment also remains conducive for further growth. In Indonesia and South Korea, local stocks continue to climb higher where incumbent and opposition parties campaign on similar platforms of driving investment and pushing reforms. These offer voters a clear solution which is less evident in developed markets, where detailed policy messages appear still to be kept on ice.
Source: All MSCI and Economic Data from Bloomberg unless otherwise stated.
Assistant Fund Manager - Asia