Matthews Asia Country Updates
For the month ending August 2018
In August, the MSCI China Index returned -3.76% and Hong Kong's Hang Seng Index returned -2.10%, both in local currency terms. China's domestic CSI300, the A share index, returned -4.97% in local currency terms (-5.36% in U.S. dollar terms). China's currency, the renminbi, ended the month at 6.83 against the U.S. dollar.
August was another lackluster month for Asia and broader emerging markets. Trade tensions between the U.S., China, Mexico and Canada weighed on sentiment while contagion from weak currencies in Turkey, Brazil, Argentina and South Africa fueled a stronger U.S. dollar and a continued flight from Asian risk assets. President Trump has not clarified his goals or intentions pertaining to Chinese trade negotiations, which has kept Asian markets unsettled.
Chinese equity and currency markets began showing signs of stability in late August. Although trade negotiations have not yet progressed and Trump seems intent of pushing tariffs onto a wider net of Chinese imported goods, the Chinese government has taken action internally to stabilize things at home. Probably the most meaningful has been the relaxing of monetary conditions for which prior tightening worked to choke off liquidity to many small and medium-size businesses. Secondly, the combination of potential fiscal stimulus and an effective lowering of individual tax rates could impact Chinese demand. Lastly, China's central bank seems to have drawn a temporary line in the sand regarding its currency depreciation, helping to stabilize markets in China and the region. In addition, recent market weakness has brought down valuations of Chinese stocks traded locally and in Hong Kong. Institutional investors who are focused on fundamentals are finding bargains even in the wake of a very strong price run-up in 2017.
In August, the S&P Bombay Stock Exchange 100 Index was flat in U.S. dollar terms; 3.52% in local currency terms.
India continued to surprise on the upside in terms of relative outperformance despite the headwinds of rates hikes, a weaker current account and a devaluing Indian rupee. Local equity markets appeared to overcome these headwinds and were focused on a robust local economy and populist government spending while enjoying the status as a safe haven to trade war-related concerns. Impressive economic growth and resilient corporate earnings aside, strong imports and higher energy prices should continue to pressure India's balance of payments and current account, which could in turn keep negative pressure on the rupee. Prolonged currency weakness may prompt the Indian central bank (RBI) to continue rate hikes to stem currency outflow pressures that could eventually weigh on economic activity. Lastly, recent relatively strong equity performance has boosted Indian stock valuations such that their premium to broader emerging markets is approaching recent highs.
In August, the Tokyo Stock Price Index returned -1.00% in local currency terms (-0.36% in U.S. dollar terms). The yen ended the month at 111.03 against the U.S. dollar.
Japanese shares have been fairly resilient to trade tensions as the domestic economy has rebounded from a soft patch earlier in the year, and the country's continued labor shortages have raised per capita wages and helped support a potential rebound in private consumption. Slow-moving, tight labor conditions are supporting the need for companies to invest in productivity and upgrades—especially in IT and human resources-related services. For now, higher labor costs are not putting undue pressure on corporate earnings as strong businesses are retaining reasonable upside pricing power. Prime Minister Shinzo Abe is expected to survive a September vote, allowing him to remain party leader for another three years. This reinforces a continuation of the current government policy mix, which should remain very accommodative for the foreseeable future.
In August, the Korea Composite Stock Price Index (KOSPI) returned 0.73% in U.S. dollar terms (1.20% in local currency terms). The Korean won rose by 0.51% against the U.S. dollar.
South Korean equities have had a difficult year on the back of languishing economic growth and modest downward revisions in corporate earnings growth. The South Korean government is taking action to boost demand through increased fiscal spending and minimum wages. Fiscal spending is expected to take a substantial jump in 2019 as the government renews its commitment to job creation and welfare support. Reasonable corporate earnings and economic activity should help boost tax revenues such that the fiscal deficit should not swell in 2019. The combination of fiscal stimulus and restrained rate hikes could help support the South Korean economy in the coming quarters. Risks do exist given trade friction between China and the U.S., which has helped pressure Korean trade and demand for its exports.
In August, the broader MSCI ASEAN Index rose 0.48%, though sentiment across Asia's emerging markets was weaker following crises in Turkey and Argentina.
Indonesia's JCI Index fell -1.62% in U.S. dollar terms (and gained 1.39% in local currency terms). Current account deficit economies such as Indonesia faced volatility, particularly amid Turkey's financial crisis and concerns of potential contagion, prompting Indonesia's central bank (BI) to hike policy rates by another 25 basis points (0.25%), bringing rate hikes in total this year to 125 basis points. To further its priority on currency stability, BI announced non-interest measures to curb the country's external deficit. Among these were measures such as halting non-urgent infrastructure projects not yet at financial closure, temporarily postponing capital goods imports by state-owned enterprises, imposing import taxes on consumer goods that have local substitutes and implementing a move to blended biodiesel. These measures come as presidential election rhetoric begins to pick up. Indonesians will go to the polls in 2019.
Thailand's SET Index was the region's best performer for the month, gaining 2.90% (1.74% in local currency terms). Thailand's significant external buffer—a current account surplus of close to 10%—has largely shielded the economy from weakened sentiment across emerging markets. The latest GDP report indicated broad-based growth driven mainly by private consumption that has slowly recovered following the passing of King Bhumibol Adulyadej, and looked to be sustained by low inflation, which is currently at the low end of the central bank's target range. Reports of widespread flooding, however, could dampen farm income growth and also potential tourism headwinds following a boating accident in Phuket in July that could keep the central bank cautious about its rate policy.
Malaysia's KLCI Index gained 0.41% (up 2.18% in local currency terms) during the month. Domestic consumption was boosted by fiscal transfers ranging from fuel subsidies to increased payments to lower-income groups and the abolition of the Goods and Services Tax from June 2018. As a result, passenger car sales accelerated, reaching 41% year-over-year growth in July 2018 from an average growth rate of -2% in the months prior to Prime Minister Mahathir's re-election. The consumption trend, however, appears front-loaded, with the sales and services tax taking effect in September 2018. During the month, Malaysia also saw the shelving of major infrastructure projects including the East Coast Rail Link, clouding medium-term growth projections. Malaysia is a net exporter of oil, however, and its short-term growth prospects should improve with higher oil prices.
The views and information discussed in this report are as of the date of publication, are subject to change and may not reflect 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 investment vehicles. Investment involves risk. Investing in international and emerging markets may involve additional risks, such as social and political instability, market illiquidity, exchange-rate fluctuations, a high level of volatility and limited regulation. Past performance is no guarantee of future results. The information contained herein has been derived from sources believed to be reliable and accurate at the time of compilation, but no representation or warranty (express or implied) is made as to the accuracy or completeness of any of this information. Matthews Asia and its affiliates do not accept any liability for losses either direct or consequential caused by the use of this information.