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Insight 13.09.2016

From the BOE to Jackson Hole

From the BOE to Jackson Hole

Emerging Asian markets closed August higher as central bank diktat drove sentiment. Markets rallied early in the month after the Bank of England cut interest rates during its first meeting following the Brexit vote.


Stocks continued to climb higher until key members of the Federal Reserve suggested that the timing of the next US rate hike was closer than market expectations. The view was carried over by Fed Chairwoman Janet Yellen during her keynote address at Jackson Hole. The MSCI Asia Ex-Japan Index returned 3.1%*.

Chinese equities led regional returns with the MSCI China returning 7.9% for the month. The key economic data point over the reported period was evidence of China’s easing deflationary pressure. July’s producer price index contracted 1.7%, better the previous 2.6% drop due to a month on month increase in metal prices. Easing deflation continues to reflect that more than a modicum of excess production has been removed. Rising prices alleviates the real burden of debt and reduces the need for the PBOC to cut interest rates, which authorities have reservations about since it may instigate RMB weakness. China’s State Council announced the approval of the Shenzhen-Hong Kong link, which is similar to the Shanghai-Hong Kong counterpart that allows local and foreigner investors to trade mainland shares. Unlike the Shanghai index which is heavier in listed state owned enterprises, the Shenzhen bourse is concentrated in new economy sectors such as technology and healthcare. 

The MSCI India gained 1.0%. During its August session, the Indian Parliament passed the its long awaited Goods and Service Tax (GST) bill which aims to eliminate a cascading tax collection that hinders trade between states.   While the near term impact is limited, with an estimated 0.8 to 1.0 percentage points added to medium term economic growth**, the productivity gains are significantly larger. The cascading tax collection, where tax is essentially added on top of taxed items, incentivized Indian businesses to utilize loopholes and sacrifice efficiencies. The GST bill removes this economic drag of goods moving between states and now mirrors a similar uniformed customs practice recognized among members in the European Union.

Prime Minister Modi appointed Deputy Governor Urit Patel as the next Governor of the Reserve Bank of India. Patel’s appointment was a positive surprise to the market, as many thought a more dovish candidate would replace outgoing Raghuram Rajan. Patel worked closely under Rajan’s team that led for inflation targeting, quelling concerns that Modi was looking for a pliable bureaucrat replacement.

Economic growth dynamics were resilient across ASEAN markets, as domestic growth offset weakness overseas.  Malaysia’s GDP grew 4.0% YoY in the second quarter of this year, in line with analyst forecasts. Thailand beat estimates by posting 3.5% YoY GDP growth in 2Q16. Indonesia posted 5.2% second quarter growth. ASEAN markets encountered some profit taking, as the MSCI Southeast Index was slightly lower over the month at minus 0.07%. North Asian markets closed higher, as the MSCI Korea index gained 2.7% while MSCI Taiwan inched 0.6% higher.

The Brexit impact has yet to materialize into tighter market conditions requiring looser monetary policies globally. In the US, improving jobs and wage data justifies a Federal Reserve hike is September, while weak inflation prices and subdued GDP data warrants a pause. Taken together, we believe that the Federal Reserve would likely choose to delay its hike in December, given the upcoming US election in November and evidence of the labor market tightness is only beginning to surface. Street analysts are looking for an increase of 180k nonfarm payroll in the August. Regardless of the timing next rate hike, we believe that the incremental moves will remain gradual.

After Jackson Hole, discussions as to whether fiscal policies should complement monetary policy remain viable to spur growth. While negative interest rates have kept borrowing costs and yields low, Yellen remains cautious of implementing such a program. The Federal Reserve’s rate decision comes shortly after the BOJ announces their own. The VIX index remains well below its early year high in January and its Brexit June spike, suggesting that other markets have either become jaded over Federal Reserve discussion or that all apparent risks are known, in our view. Given the bifurcation of the US central bank’s meeting, we expect that markets will likely remain volatile for most of September.

*Source: All MSCI Data and Economic Data from Bloomberg unless otherwise stated
** Source: HSBC Research


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Christopher Chu
Assistant Fund Manager - Asia

 

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