Asian markets outperformed world indexes in December, as the MSCI Asia Ex-Japan returned 2.5% over the month. Market returns were led by the domestic demand-driven economies of China, India and ASEAN, which outperformed the more northern South Korea and Taiwan markets. Investors followed central banks’ busy meeting schedules closely in December, including the Federal Reserve’s decision to raise interest rates for the third time before the end of the year while the European Central Bank kept borrowing costs near record lows.
The MSCI China returned 2.0% over the month. Beijing reiterated its commitment to implementing financial reforms and mitigating systemic risks. The People’s Bank of China followed the Federal Reserve’s decision to tighten monetary policies, hiking the seven-day reverse repo rate by 5 basis points to 2.50% while also raising the 1-year medium-term lending facility interest rate by 5 basis points to 3.25%. Consumer staple and healthcare stocks led returns.
The MSCI India rallied 3.8% as previous concerns regarding state elections were assuaged. Prime Minister Modi and his BJP party maintained power in Gujarat state while also defeating the Congress party in Himachal Pradesh. Government spending expectations boosted industrial and infrastructure stocks, while rate-sensitive sectors underperformed.
North Asian markets eked out positive gains, with the MSCI Taiwan and MSCI Korea rising by 0.4% and 0.3% respectively. Trade data continued to reflect sequential growth amid broad improvements in the global economy. Taiwan’s November exports rose 14.0% year on year, more than expectated, while Korea’s expanded by 9.6%, higher than the previous month. Taiwanese energy and Korean healthcare names were the top performers.
The MSCI ASEAN outperformed regional markets, returning 4.3%. The MSCI Indonesia returned 8.9%, led by financial and material names. The MSCI Thailand and MSCI Philippines each rose by 4.6%, and the MSCI Malaysia advanced 4.2%. As for the MSCI Singapore, it dropped 0.2%. Central banks in Indonesia, Thailand, and the Philippines left the main borrowing rates unchanged in December.
Major equity markets rallied sharply in 2017 as early-year expectations of protectionist policies never materialised while commodity prices and global trade dynamics recovered. President Trump’s inauguration and subsequent decision to withdraw the US from the Transpacific Partnership asserted his ‘America First’ agenda, an anathema to multilateralism and globally recognised trade institutions. Despite support from the Republican majority in Congress, the administration’s inability to push through its agenda has exposed the ephemeral appeal of nationalism and reduced the popularity of candidates that ran on similar platforms to Trump’s in recent European elections.
This fading protectionism has augured well for emerging markets, particularly Asia and its major export-driven economies that participate in global supply chains.
Asian markets have been supported by better earnings growth than anticipated across the region, including internet and information technology companies, which accounted for a significant proportion of the MSCI Asia Ex-Japan’s returns in 2017. Rising regional demand and growing intra-regional trade has not only provided support for Asian companies but also demonstrated their waning vulnerability in the event that the US should go ahead and erect new investment barriers or trade tariffs. This phenomenon is best demonstrated by the changes in Asian currency exchange rates, which have moved in sync accross Asian neighbours regardless of their current account positions.
Economic data and reported earnings suggest that these factors will likely be carried over into 2018. Asia’s economic growth outlook remains well anchored by the region’s two largest economies, China and India, both of which have implemented structural reforms in recent years. We expect China’s economy to decelerate in 2018, primarily due to a slowdown in fixed-asset investments, reflecting Beijing’s efforts to prioritise domestic consumption and address excess capacity in older industries. India’s economy should offset China’s rebalancing exercise, as small and medium-sized enterprises recover from the impact of demonetisation and the implementation of the goods and services tax.
While the current cycle appears to be in its later stage, all major economies are expected to expand in 2018 which could extend this cycle, leading to a positive spillover and driving a subsequent pickup in local capital investments. This would overlap with the continued expansion of intra-regional trade, evident both from a pickup in value and from volume demand emanating from end users within Asia.
Global liquidity remains accommodative amid benign inflationary pressure. At its meeting in December, the Federal Reserve raised its main borrowing costs for the third time in 2017, signalling three additional hikes in 2018 alongside an incremental reduction of its balance sheet. The Federal Reserve’s liquidity withdrawal is essentially being offset by an ongoing quantitative easing exercise by the European Central Bank, which is likely to continue for most of the first half of 2018. Asian central banks have responded in tune to domestic factors rather than to the Federal Reserve, suggesting that a broad-based tightening cycle remains some time away.
This should provide a favourable backdrop for Asia in 2018, where we maintain a constructive outlook for markets. A sudden surge in the US dollar’s strength or a more aggressive tone on interest rates from the Federal Reserve would create market headwinds given significant currency appreciation in Asia, but provides an attractive entry point for investors. The traditional view that a stronger dollar against Asian currencies is detrimental to Asian economies is fading due to the proliferation of Chinese and regional technology companies delivering domestically driven earnings. There is also an evident decoupling between dollar appreciation and weaker oil prices as a result of better energy efficiency and technological advancements, which indirectly supports the quality of assets held by financial institutions.
Fund Manager - Asia