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Expertise 19.04.2016

Asian Equities: Where Are We Now?

Asian Equities: Where Are We Now?

With Asian markets concluding 1Q16 and moving into 2Q16, we would like to highlight our latest thoughts on the region and what to expect.


Asian equities ended the first quarter slightly better than from where it began, but the statement belies the journey that markets took. Worries over diverging monetary policies across major central banks, a hard landing scenario in China, and continued fall in oil prices erased, at one point, almost 13% off the MSCI Asia Ex-Japan index during the first quarter of 2016. Risk appetite reversed in March, as the index pared losses to inch 1.3% gains over the three-month period, leaving investors asking, “Where are we now?”

Over the quarter, China garnered most of the market anxiety. January’s circuit breakers triggered investors to believe that state intervention was moving away from much advertised reforms promised by Beijing. But most investors fretted over the direction of China’s currency and the pace at which the RMB would devalue against the USD.  Fears were further instigated as the People’s Bank of China Governor Zhou did little to guide the market in a fashion similar to central banks in the G3. At its trough, the MSCI China lost almost 19% during the first half the quarter, before gaining 11.6% in March to close 4.7% lower over the three-month period.

Risk sentiment returned as Governor Zhou became more visible. The Governor’s interview in China’s financial media outlet Caixin was Zhou’s first public statement following the RMB’s August devaluation in 2015. In the article, Zhou’s comments that China would not significantly devalue the RMB to promote a trade advantage would become the tenet reiterated at both the G20 meetings in Shanghai as well as during the National People’s Congress in Beijing.

Around mid-February, high frequency macro data also assuaged worries that China was in the midst of a hard-landing scenario. Beijing reported economic growth of 6.9% in 2015, in-line with the government’s target of “around 7.0%,” underlined by a rising contribution of service sector industries. Stabilization in foreign exchange reserves was also well received by the market amid concerns that a surge in capital outflow would further depreciate the RMB. China’s foreign exchange reserve settled to $3.2tn in February, after monthly declines averaged nearly $100bn between November and January.

The turnaround in China’s economic outlook came amid a backdrop of a recovery in oil prices as OPEC members look to refrain from increasing global production. Commodities climbed as major central banks maintained accommodative monetary policies. The Bank of Japan surprised the market by introducing negative interest rates while the European Central Bank further lowered their deposit rates. Dovish comments by the Federal Reserve Chair Yellen followed, where the US central bank pulled back its hike guidance from four to two.

With Yellen’s comments now overlapping market expectations, the near-term environment remains positive for risk appetite, particularly Asian equites. But challenges still linger. Though a job recovery in the US further lowers the risk of a global recession, there is little evidence of a renewed acceleration in the world economy given evidence of sluggish trade data.

Within Asian equity, continued strength in domestic driven economies should help offsets external sluggishness, in our view. Rising intra-regional trade in ASEAN supports the bloc nations, where a recovery in fiscal spending has been evident thus far in Indonesia, Thailand and the Philippines. Pickup in public spending should lead to a ‘crowd in’ effect for private investments to spur growth. India’s economy continues to expand without the assistance of political will, which should play a growing part throughout the year as Prime Minister Modi looks to reestablish party credibility.

For China, growth drivers will continue to migrate into higher value service sectors. The country’s economic pace is in-line with the government’s target to expand the economy “between 6.5% and 7.0%.” Economic policy will move tangent with its job creation goals, which suggests that the lower end of the range would be acceptable to Beijing. Supply side reforms have commenced, which should address overcapacity issues that galvanize deflationary pressure that have plagued the economy for a record 48 months.

The main risk in our view is volatile movement in the USD caused by political anxiety and further downside to global growth. Worries over a Brexit scenario, a migrant crisis, or populism rhetoric in US presidential campaign election would see investors moving back into the USD amid heighted volatility. Hopefully, policy makers in Asia do not confuse the March rally as renewed risk appetite and continue to implement policies that strengthen economic objectives. However, as more attention now falls onto the Federal Reserve’s June meeting, market patience is likely to be tested.


ChristopherChu.jpg

Christopher Chu
Assistant Fund Manager - Asia

 

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  • The index fell sharply in April for the second consecutive month.
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US: Consumer confidence (CB) (Apr): 128.7 vs 126 expected (prior: 127 revised from 127.7)

  • The improvement in confidence was spread evenly across the present situation and expectations indices.

 

US: New home sales (Mar): 694k vs 630k expected (prior: 667k revised from 618k)

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US: Housing prices (FFHA) (Feb): 0.6% q/q as expected (prior: 0.9% revised from 0.8%)

 

Germany: IFO (Apr): 102.1 vs 102.8 expected (prior: 103.3 revised from 103.2)

  • Expectations: 98.7 vs 99.5 expected (prior: 100 revised from 103.2)
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  • Manufacturing: 109 vs 110 expected (prior: 110 revised from 111)
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US: Markit Manufacturing PMI (Apr.): 56.5 vs 55.2 expected (prior: 55.6)

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US: Markit Services PMI (Apr.): 54.4 vs 54.1 expected (prior: 54)

  • A modest rebound in flash estimate for services: improving new orders, but lower employment.

 

US: Existing home sales (March): 5.6M vs 5.55M expected (prior: 5.54M)

  • A rebound in sales of condos, but a modest rise in single family house. Inventories were slightly on the rise.
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Eurozone: PMI Manufacturing (Apr.): 56 vs 56.1 expected (prior: 56.6)

  • Flash estimate of business sentiment has eroded further from past month; the fall was limited in Germany (-0.1 point) but larger in France (-0.3 pt).
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Eurozone: PMI Services (Apr.): 55 vs 54.6 expected (prior: 54.9)

  • Flash estimate in services has slightly increased from past month; sentiment has increased more in France (+0.5 pt) than in Germany (+0.2 pt).

 

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Market insight 24.04.2018

Richmond Fed manufacturing fell sharply in April, disappointing German IFO survey

US: Richmond Fed manufacturing (Apr): -3 vs 16 expected (prior: 15)

  • The index fell sharply in April for the second consecutive month.
  • The underlying composition was generally weak, with sharp declines in the shipments and new orders components.

 

US: Consumer confidence (CB) (Apr): 128.7 vs 126 expected (prior: 127 revised from 127.7)

  • The improvement in confidence was spread evenly across the present situation and expectations indices.

 

US: New home sales (Mar): 694k vs 630k expected (prior: 667k revised from 618k)

  • On a m/m basis: 4% vs 1.9% expected (prior: 3.6% revised from -0.6%)
  • By region, March sales increased in the West (+28.3%), South (+0.8%) but declined in the Northeast (-54.8%) and Midwest (-2.4%). Inventory available on the market edged down to 5.2 months of available supply, towards the lower end of its 12-month range.

 

US: Housing prices (FFHA) (Feb): 0.6% q/q as expected (prior: 0.9% revised from 0.8%)

 

Germany: IFO (Apr): 102.1 vs 102.8 expected (prior: 103.3 revised from 103.2)

  • Expectations: 98.7 vs 99.5 expected (prior: 100 revised from 103.2)
  • Current assessment: 105.7 vs 106 expected (prior: 106.6 revised from 106.5)
  • The headline decline was driven by a drop in expectations. From a sector perspective, sentiment in manufacturing eased further from high levels, while construction and retail sentiment improved slightly.
  • Note that there have been methodological changes to the survey this month, which in theory should make it a better guide to German GDP growth.

 

France: Business confidence (Apr): 108 as expected (prior: 109)

  • Manufacturing: 109 vs 110 expected (prior: 110 revised from 111)
Market insight 23.04.2018

Flash PMI manufacturing: higher in the US but lower in the eurozone; flash PMI services higher in the US and in the eurozone

US: Markit Manufacturing PMI (Apr.): 56.5 vs 55.2 expected (prior: 55.6)

  • Flash estimate of business sentiment in manufacturing has rebounded from past month thanks to new orders and production.
  • These data, if confirmed, will fuel the scenario of a rebound in activity in Q2.

 

US: Markit Services PMI (Apr.): 54.4 vs 54.1 expected (prior: 54)

  • A modest rebound in flash estimate for services: improving new orders, but lower employment.

 

US: Existing home sales (March): 5.6M vs 5.55M expected (prior: 5.54M)

  • A rebound in sales of condos, but a modest rise in single family house. Inventories were slightly on the rise.
  • Median and average prices of houses sold remained on a strong trend (respectively: 5.8% y/y; 4.1% y/y).
  • Trend in sales remain positive, but monthly data were highly volatile over the past four months.

 

Eurozone: PMI Manufacturing (Apr.): 56 vs 56.1 expected (prior: 56.6)

  • Flash estimate of business sentiment has eroded further from past month; the fall was limited in Germany (-0.1 point) but larger in France (-0.3 pt).
  • Business sentiment has probably weakened in peripherals leading to the monthly fall in total estimate.
  • Growth should stabilize at a slightly lower pace in Q1-Q2 compared to the highs seen in Q4.

 

Eurozone: PMI Services (Apr.): 55 vs 54.6 expected (prior: 54.9)

  • Flash estimate in services has slightly increased from past month; sentiment has increased more in France (+0.5 pt) than in Germany (+0.2 pt).

 

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Switzerland: M3 (March): 3.3% y/y (prior: 3.7%)

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Market insight 19.04.2018

Mixed Philly Fed business sentiment in the US; declining sales in UK

US: Philadelphia Fed. (Apr.): 23.2 vs 21 expected (prior: 22.3)

  • Sentiment on current situation has slightly increased but the six-month view index has significantly declined from previous highs.
  • Positive view on current situation has been fueled by rising prices paid, employment and average workweek, while shipments and new orders were on the decline.
  • The decline on future view has been fueled by orders, employment and capital expenditure.
  • As the survey is very volatile, it is difficult to really conclude on the underlying trend except a return from previous high level.

 

US: Initial jobless claims (Apr. 14): 232k vs 230k expected (prior: 233k)

  • Continuing claims at 1863 k after 1878 k past week.

 

UK: Retail sales (March): -0.5% m/m vs -0.4% expected (prior: 0.4% revised from 0.6%)

  • Extraordinary bad weather conditions have weighted down on monthly sales, and the fall was broad-based across sectors.
  • Consumption has weakened in Q1; downside risks remain in place as the political situation has turned more fragile domestically.

 

Poland: Industrial production (March): 11.4% m/m vs 12.4% expected (prior: -2.2%)

  • Technical rebound after the fall past month; the yearly trend has moderated.

 

Poland: PPI (March): 0.4%m/m vs 0.1% expected (prior: -0.2% revised from -0.3%)

  • PPIs have rebounded from -0.1% y/y to 0.3% y/y.