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Matthews Asia Country Updates


For the month ending January 2015


China/Hong Kong

In January, the MSCI China Index returned 2.26%. Hong Kong's Hang Seng Index returned 3.82% (3.84% in U.S. dollar terms) and China's domestic CSI300, the A share index, returned -2.79% (-3.49% in U.S. dollar terms). China's currency, the renminbi (RMB), ended the month at 6.25 against the U.S. dollar. 

China’s 4Q14 GDP growth was 7.3%, unchanged from 3Q14. This was slightly better than market expectations of 7.2%. Macro statistics for China continue to be mixed. Export growth came in above expectations at 9.7% in December compared to 4.7% in November and import growth was -2.4% in December, improving from the -6.7% seen in November. Industrial production grew 7.9% year-over-year, and fixed asset investment (FAI) growth was 15.7%. FAI growth was dragged down by the property sector. Property FAI growth was 10.5% in 2014, a sharp slowdown from the full year growth for 2013, which was around 20%. December’s new loans grew 13.6% and reached RMB 697 billion. This compares to 13.4% growth experienced in November. Total social financing rose 15.8% in December from 15.3% in November. 

China’s A-share markets cooled during January after outperforming strongly in December 2014. This was in part due to efforts by the Chinese government to deliberately calm its domestic markets as authorities suspended three major brokers’ margin financing business on the premise that they had rolled over margin-trading contracts for a number of large clients and hence not appropriately managing their risk exposures. The average share of margin financing in daily total turnover increased to 16% in December from 15% in November and an average of 11% in January to October.

Subsequent to China’s interest rate cut last November, China announced a reserve ratio requirement (RRR) reduction of 0.5%, effectively lowering the RRR to 19.5% for large banks and 17.5% for small and medium-sized banks. This RRR cut was widely expected by the market although the announcement of the measure came slightly earlier than expected. China is continuing to release more money into its monetary system to help stabilize overall growth. Many observers also expect that further monetary easing measures may continue to be introduced. 

India

In December, the S&P Bombay Stock Exchange 100 Index gained 6.4% (4.62% in U.S. dollar terms). Foreign institutional investments saw net inflows in January, compared to net outflows in December. While no major investment reforms took place in January, the central bank did cut repo rates by 25 basis points (0.25%) to 7.75% amid falling inflation. This coincided with the upward market movement, especially among rate-sensitive sectors such as capital goods and realty. 

Indian firms have begun releasing corporate earnings results, and indicators seem to show an across-the-board moderation in growth. However, some sectors have seen a pickup in margins on the back of falling commodity prices. Public sector banks have seen a rise in credit costs, and overall, it appears that fundamentals have yet to catch up with the market’s recent positive sentiment. 

Most economic data released in January indicated continued growth. The country made changes in the national accounts calculation methodology, and updated its base of national accounts from 2004–2005 to 2011–2012, which caused a revision in fiscal 2014 economic growth data from 5% to 6.9%, and fiscal 2013 data from 4.7% to 5.1%. The new methodology derives real growth numbers from market prices versus factor cost method used earlier. The country’s Foreign Direct Investment (FDI) increased by 26% in 2014 and reached a total of US$35billion. Much of these inflows were directed to the services sectors including electricity, gas, water, waste management, information and communication. 

Looking ahead, the government plans to meet its target of 4.1% fiscal deficit by March end, even though it has already surpassed its estimate as of the end of December. It plans to do this by accelerating its divestment program and cutting down its plan expenditure. 

Japan

In January, the Tokyo Stock Price Index increased 0.54% (2.29% in U.S. dollar terms). Health care, consumer staples and telecommunications were the main outperformers, while financials and energy stocks were the largest underperforming sectors. The yen strengthened by 1.93% against the U.S. dollar over the period.

Macroeconomic data was mixed during the month with the trade deficit for 2014 reaching a record level of 12.8 trillion yen. However, there were signs of improvement in December as year-over-year export growth of 13% rose faster than the 1.9% increase in imports. The weaker yen, lower global oil costs and subdued domestic demand were all likely contributors to this change.

The unemployment rate fell to 3.4% in December, its lowest level since 1997 while the job offers-to-applicants ratio rose to 1.15, its highest level since 1992. Both of these indicators suggest a tightening labor market, which it is hoped will lead to meaningful real wage growth, and in turn, a boost to systemic inflation.

The consumer price index, excluding fresh food and energy, increased by only 2.1% in December. This remains below the Bank of Japan’s long-term target of 2% when adjusted for the impact of the April consumption tax hike.


Korea

During the month, the Korea Composite Stock Price Index advanced 1.76% in local currency terms and 1.01% in U.S. dollar terms. The Korean won depreciated 1.06% against the U.S. dollar.
 
January saw an estimated trade surplus of US$5.5 billion. Exports were mostly flat, down slightly -0.4% compared to the same month for the previous year due to falling prices for refined oil and petrochemical products, which are highly correlated with oil price. Dubai Crude oil price, the price benchmark in the region, dropped to US$45.8 per barrel from US$104 a year ago. Accordingly, the export contribution of refined oil and petrochemical products fell from 19% to 14%, despite continued stable growth by volume. In addition, Russia’s economic instability posed a drag on exports during the month. Exports to the U.S. continued to be robust, and exports to China rebounded since the fourth quarter of 2014. However, exports to Japan and emerging markets, excluding Latin America, were sluggish due to the delayed economic recovery. 
 
During the month, the Bank of Korea held its policy rate steady at 2.0%. The consumer price index for January was unchanged from the previous month, although cigarette prices jumped 80% from the start of the year due to a tax hike on cigarettes. Prices for public transportation have dropped -9.2%, somewhat offsetting the impact from the rise in cigarette price. 

Southeast Asia

In January, the MSCI South East Asia Index returned -0.40% in U.S. dollar terms. Notably, the Philippine Stock Exchange PSEi Index advanced 6.35% in local currency terms (7.65% in U.S. dollar terms). Indonesia’s Jakarta Stock Exchange Composite Index advanced 1.19 % in local currency terms (but fell -1.46% in U.S. dollar terms). 

The Philippine economy saw its GDP rise 6.9% year-over-year in 4Q2014, faster than consensus estimates of 6%. Growth for 2014 was 6.1%, making Philippines one of the fastest-growing countries in Asia. This more rapid pace of growth came on the back of foreign direct investment of US$6 billion for the year, according to the Department of Trade and Industry. Government officials and the rebel group Moro Islamic Liberation Front signed an agreement to decommission rebel firearms. A landmark peace deal signed last year was in danger of collapse after dozens of police commandos were attacked by a splinter rebel group.

In Indonesia, the revised budget submitted for 2015 projected GDP growth of 5.8% and inflation at 5%. Falling crude prices and cuts in subsidies have given the government flexibility to focus on growth-oriented development projects with up to US$12 billion available for infrastructure and transportation sectors. 

In January, controversy over the nomination of a new national police chief set off some political furor, and criticism of the president’s administration. Indonesian police chief candidate, Commander General Budi Gunawan who has had close ties to a political ally of President Joko Widodo, was named as suspect in a corruption case. Gunawan’s nomination was seen as a blow to Jokowi’s promise of a clean and corruption-free civil service body.


January 2015

Southeast Asia

In December, the MSCI South East Asia Index declined -2.96% in U.S. dollar terms. Notably, Thailand’s SET Index declined -6.04% in local currency terms (-6.06% in U.S. dollar terms). Indonesia’s Jakarta Stock Exchange Composite Index advanced 1.50% in local currency terms (-0.16% in U.S. dollar terms). 

Indonesia’s headline inflation rose to 8.4% year-over-year in December, from 6.2% in the previous month. The rise was mainly driven by the increase in fuel prices following subsidy cuts. High inflation is not expected to persist based on historical data of past subsidy cuts that have led just temporarily to inflationary pressures. President Joko Widodo’s government continued to make key appointments and expand on policy measures. The new head of the Investment Coordinating Board has targeted investment from export-oriented and labor-intensive industries in order to support the government’s target of 2 million new jobs a year. 

In Thailand, the central bank left its policy rate unchanged at 2.00%, in line with consensus expectations. The central bank continued to set a dovish tone in its policy statement reflecting downside risks to growth and subdued inflationary pressures from lower oil and food prices. The Bank of Thailand projected 0.8% economic growth for Thailand for 2014, down from earlier estimate of 1.5%. Growth estimates for 2015 were also revised down from 4.8% to 4.0%.


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.