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Matthews Asia Country Updates


For the month ending August 2016


China/Hong Kong

In August, the MSCI China Index returned 7.33% and the Hong Kong's Hang Seng Index returned 5.23%, both in local currency terms. China's domestic CSI300, the A share index, returned 4.07% in local currency terms (3.39% in U.S. dollar terms). China's currency, the renminbi (RMB), ended the month at 6.68 against the U.S. dollar. The real effective exchange rate was down 6% year-to-date through the end of July, but was up by 46% from June 2005, when China began to reform its exchange rate mechanism.

In the first seven months of 2016, new home sales, on a square meter-basis, rose 26.7% year-on-year, after rising 6.9% for all of 2015, and compared to an increase of 6.9% a year ago. Online retail sales of goods rose 26.1% year-on-year through July.

In July, inflation-adjusted retail sales in China rose 9.8% year-over-year, compared to 10.4% a year ago and 10.5% in July 2014. Real retail sales was up 9.7% for the first seven months of the year, compared to 10.5% during the same period a year ago and 10.7% two years ago. While this reflects an ongoing gradual deceleration of almost every economic data set, China remains a compelling consumer story.

India


Indian markets were higher in August after the Goods and Services Tax (GST) was cleared by India’s Upper House of Parliament, the Reserve Bank of India (RBI) appointed a new governor and positive economic data emerged. The S&P Bombay Stock Exchange 100 Index returned 1.62% in U.S. dollars (1.87% in local currency) driven by gains in the financials, consumer discretionary and energy sectors. The information technology and telecom sectors have been recent detractors.

Additionally, 16 states have also already ratified the GST, paving the way for the president’s approval. Expectations are that the government will roll out the new tax regime prior to April 2017.

India's new central bank governor, Urjit Patel, was appointed as the 24th governor of RBI. His appointment provides visibility into the continued monetary policy regime envisioned by Raghuram Rajan, and likely allayed some fears that the government may adopt a looser monetary policy.

August economic data signaled improvements in India’s rural economy, including higher sales of tractors and two-wheelers that suggest consumption demand might be growing in rural India.

Many corporate earnings reports, for the quarter ending June, were reported in August. The month saw overall earnings growth that seemed to lag expectations, with quarterly earnings declining in comparison to the same period last year despite strong sequential quarters of growth. Private sector financials and consumer discretionary, led by autos, did well in August on the back of good earnings growth. Companies in the information technology sector reported poor earnings growth and provided a dismal outlook, which led to a negative stock price reaction. The telecom sector performed negatively as investors worried about rising competitive intensity following the entry of a new player with deep pockets.

Japan

In August, the Tokyo Stock Price Index increased by 0.54% in local currency terms (-0.36% in U.S. dollar terms). Materials, information technology and financial stocks outperformed while healthcare, consumer staples and utilities stocks underperformed. The yen weakened by 1.02% versus the U.S. dollar.

Macroeconomic data was soft with exports falling 14% in July as a result of the strong yen and weak external demand. Annualized GDP growth of 0.2% in the second calendar quarter was also below expectations after expanding by 1.9% in the first three months of the year.

On a more positive note, the seasonally adjusted unemployment rate fell to 3% in July, its lowest point since 1995. It is hoped that further tightening in the labor market will ultimately result in a meaningful increase in wages throughout the country.

Inflation data, meanwhile, continued to look weak with the consumer price index, excluding fresh food and energy, increasing by only 0.3% in July. This remains well below the Bank of Japan’s medium- term target of 2% and has led to expectations of an expansion to the ongoing stimulus program. 

South Korea

During the month, the Korea Composite Stock Price Index (KOSPI) returned 0.92% in local currency terms and 0.62% in U.S. dollar terms.

South Korea’s trade surplus rose to US$5.3 billion in August, as both imports and exports rebounded for the first time in about 20 months. Exports rose 2.6% and imports rose 0.1% compared to a year ago.

National retail sales figures released for July were strong in part from the lower base seen a year ago following the domestic outbreak of the Middle Eastern Respiratory Syndrome. Sales at convenience stores rose 15.4% and department stores rose 7%. Online sales also rose 20%. At the end of September, a much-debated new anticorruption act is expected to take effect. The law makes it illegal for public officials to receive gifts worth 50,000 won (US $45) or more, or cash of 100,000 won (US$91) or more as tokens for weddings or funerals. The law has been controversial in part due to a broader definition set for “public officials,” which includes journalists and school teachers. Aimed at improving transparency, the new act has also been criticized for the amounts it sets as graft, including not allowing public officials to accept meals or entertainment worth  US$27 or more. 

Southeast Asia

In August, the MSCI South East Asia Index returned 0.63% in U.S. dollar terms, as markets reacted to the increased probability of early rate hikes by the U.S. Federal Reserve. Indonesia’s Jakarta Composite Index rose 3.28% in local currency terms (1.62% in U.S. dollar terms), building on the tail winds generated by a strong 2Q16 GDP growth outcome of 5.2%. The Philippines’ Stock Exchange PSEi index slumped -1.87% in local currency terms (-1.02% in U.S. dollar terms) as earnings results remained lackluster in 2Q16. Meanwhile, Thailand’s SET index put in another solid performance, gaining 2.33% in local currency terms (and 2.8% in U.S. dollar terms as the Thai Baht continued to strengthen on a rising current account surplus).

In Thailand, GDP for 2Q16 came in stronger than expected at 3.5% (compared to 3.2% in 1Q16), supported by domestic consumption, driven by government spending and tourism. Sentiment firmed as the Thai government conducted a successful referendum on the new constitution and improved rainfall boosted the outlook for the agricultural sector.

In the Philippines, sustained optimism for President Duterte’s administration steered the index above 8,000, but earnings disappointments from select index names triggered a sell-off. On the macro front, the strong 2Q GDP growth print of 7% year-over-year failed to excite investors, with foreigners turning net sellers for the first time since April.

In Indonesia, the tax amnesty had a slow start, with a total penalty paid of Rp3.9 trillion, 2.4% of the 9- month target. August inflation was better than expected, at 2.79% year-over-year, underscoring the room for policy rate cuts.

August 2016



The views and information discussed in this article are as of the date of publication, are subject to change and may not reflect the writer's current views. The views expressed represent an assessment of market conditions at a specific point in time, are opinions only and should not be relied upon as investment advice regarding a particular investment or markets in general. Such information does not constitute a recommendation to buy or sell specific securities or investments vehicles.