Matthews Asia Country Updates
For the month ending October 2015
In October, the MSCI China Index returned 9.08%. Hong Kong's Hang Seng Index returned 8.78% (8.78% in U.S. dollar terms) and China's domestic CSI300, the A share index, returned 10.36% (11.07% in U.S. dollar terms). China's currency, the renminbi (RMB), ended the month at 6.32 against the U.S. dollar, a devaluation of less than 2% since the end of July. The real effective exchange rate was still up 3.6% year-to-date through the end of September, and was up by 57% from June 2005, when China began to reform its exchange rate mechanism.
Strong growth in real (inflation-adjusted) retail sales over the last three months demonstrate that just as there was little positive wealth effect from the market's steep rise, there is unlikely to be a significant negative wealth effect on the way down. In September, new home sales, on a square meter-basis, rose 8.8% year-on-year, after rising 15.6% in August, and compared to a fall of 12.1% in September 2014. Online retail sales of goods rose 34.7% year-on-year through September.
Manufacturing and construction activity continues to be weak, but the largest part of the economy—consumption and services—remains healthy, and the long-awaited rebalancing of the Chinese economy is well underway. This is necessarily leading to slightly slower growth, but this growth comes on a very big base and should be more sustainable. This rebalancing also creates opportunities for investors to focus on the new growth drivers. For the first time ever, services and consumption accounted for over half of China’s GDP—an important milestone in the rebalancing process.
A meeting of senior Communist Party leaders in October resulted in pledges to continue with economic and social reforms, including environmental protection. While no major new initiatives were announced, Party leaders did signal that they will continue to take steps to ensure that growth does not decelerate too rapidly.
In October, India’s markets were higher possibly due to a greater-than-anticipated interest rate reduction by the Reserve Bank of India (RBI) and due to better than expected industrial production data. The S&P Bombay Stock Exchange 100 Index returned 1.44% (1.62% in U.S. dollar terms), led by gains in the financials, consumer discretionary, and energy sectors.
In late September, the RBI had unexpectedly reduced the repo rate by 50 basis points (0.5%). The central bank cited the need to spur industrial capital expenditure as one of the primary reasons for the accommodative monetary policy stance. Further, cheaper cost of capital should allow heavily indebted corporations in India to reduce the interest burden and, hopefully, create financial flexibility to reduce principal debt amounts.
The index of industrial production reported for the month of August showed a sharp increase to 6.4% as compared to 4.1% in the previous month and versus 2.6% for the same time last year. Industrial growth in August 2015 was ahead of expectations, led by growth in the capital goods and consumer durables segments. While the consumer price index was reported at 4.41% for September 2015—higher than the 3.74% reported in the previous month—the inflation trajectory likely remains well within the RBI’s expectations.
During the quarterly corporate reporting season for the period ending September 2015, results and commentary from management teams seemed to suggest that earning expectations for fiscal year 2016 remain high. The asset quality of the banking system has not yet shown any sign of stabilization. Real estate construction activity and housing demand remained slow as indicated by the slower growth of housing finance companies. Consumer staples companies are too tentative to initiate price increases amid a weak demand and low inflation environment. This appears to have led to slower-than-expected revenue growth, although lower commodity prices have meant more robust profitability for the entire sector. Information technology companies have reported fairly robust growth and profitability for the first half of fiscal 2016, but very muted forward-looking commentary for the second half of fiscal 2016 has impacted stock valuations in the sector.
In October, the Indian state of Bihar took to the polls to elect a new state government. Many investors are watching the election results very closely as a win for Prime Minister Narendra Modi’s Bhartiya Janta Party should imply higher representation in Upper House of Parliament, and help pave a smoother path for central government policy reforms.
In October, the Tokyo Stock Price returned 10.4% (9.48% in U.S. dollar terms). Telecommunications, industrials and materials were the best-performing sectors while utilities and financials were the largest underperformers. The yen depreciated by 0.62% against the U.S. dollar.
Export data was disappointing with September’s rise of 0.6% falling below expectations due to the impact of slowing demand from China. In the domestic economy, household spending was also weak, with the 0.4% fall particularly disappointing in light of the previous month’s 2.9% gain.
On a more positive note, factory output measures surpassed expectations with an expansion of 1%, following contractions in each of the previous two months. Furthermore, the labor market continues to report encouraging data with unemployment remaining at seasonally adjusted low levels of 3.4% and the job offers-to-applicants ratio increasing marginally to 1.24.
Inflation metrics remained subdued with the consumer price index, less the impacts of fresh food and energy, rising by 0.9% during September. While this remains below the medium-term target of 2%, the Bank of Japan opted not to increase its monetary stimulus, despite increasing pressure to do so.
During the month, the Korea Composite Stock Price Index returned 7.36% in local currency terms and 3.40% in U.S. dollar terms. The Korean won appreciated 4% against the U.S. dollar.
October trade data showed a similar pattern throughout this year—a large trade surplus driven by sizable import declines versus export decline levels. Exports fell 15.8% while imports dropped 16.6%, resulting in a trade surplus of US$6.7 billion. While export volume grew from June to September, the volume declined 9.4% in October.
During the month, the Bank of Korea held its policy rate steady at 1.5%. South Korea’s Economic Sentiment Index, an indicator of both consumer and producer sentiment, improved by one point to 94.
In October, the MSCI South East Asia Index returned 8.14% in U.S. dollar terms. Notably, the Jakarta Stock Exchange Composite Index (JCI) returned 5.48% in local currency terms (12.70% in U.S. dollar terms) and the FTSE Bursa Malaysia KLCI Index rose 4.02% in local currency terms (6.19% in U.S. dollar terms).
The Indonesian government announced a series of economic policy measures aimed at stabilizing sentiment and shoring confidence in the economy. Some of the notable measures involved cuts in red tape to boost foreign direct investment, proposed cuts in corporate taxes from 25% to 18% and a predictable formula for the calculation of minimum wage increases based on nominal GDP growth.
In Malaysia, government officials presented a 2016 budget with a commitment to show more fiscal discipline. Malaysia is targeting a fiscal deficit of 3.1% of GDP for next year, slightly down from an expected 3.2% in 2015 and 3.4% in 2014. Oil and gas-related revenues, which contributed more than MYR 60 billion (US$14.15 billion) in 2014 is expected to contributed 30 billion ringgit (about US$7.08 billion) to the government budget in 2016. However, extra revenue of 27 billion ringgit (about US$6.37 billion) from Malaysia’s relatively new Goods and Services Tax, introduced in April, should offset some of the shortfall.
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.