Matthews Asia Country Updates
For the month ending February 2017
In February, the MSCI China Index returned 3.57% and Hong Kong's Hang Seng Index returned 2.01%, both in local currency terms. China's domestic CSI300, the A-share index, returned 1.91% in local currency terms (2.19% in U.S. dollar terms). China's currency, the renminbi, ended the month at 6.87 against the U.S. dollar.
During the Lunar New Year “Golden Week” holiday, China’s retail sales and catering revenue rose 11.4% compared to the same “Golden Week” holiday a year ago, 0.2 basis points faster than the growth rate for the same period of last year. Domestic tourism revenue rose 15.9%, after a rise of 16.3% during the same holiday last year.
China’s foreign exchange (FX) reserves dipped below US$3 trillion in January, after a 9.6% year-over-year decline last year. Even if FX reserves were to decline by another 10% during 2017, that would still leave China with abundant reserves. It is also worth noting that the gradual decline in FX reserves has had little impact on liquidity in China, with the benchmark lending rate barely moving over the past 18 months.
Chinese equities were star performers in February. Several factors have contributed to improved sentiment in China. First, investors have under-appreciated the positive effects associated with reflation, and nominal GDP is recovering. In addition, our analysis points to continued under-allocation to Chinese equities within the majority of global emerging market funds.
India posted solid gains in February, and the S&P Bombay Stock Exchange 100 Index returned 5.50% in U.S. dollar terms (4.06% in local currency terms).
Right or wrong, India’s market seems to have discounted any significant negative consequences from demonetization. After a brief dip in November, local equity prices have surpassed pre-demonetization levels and market participants seemed fixated on an improved earnings outlook. Although company earnings releases have tended to support an economy in recovery, it is still too early to estimate the full effect of demonetization. However, the market has come to realize that next quarter’s earnings base is fairly low. Earnings estimates seem beatable—inclusive of negative surprises. There are a few other factors that contributed to market optimism in February. Inflation seems contained but steady, meaning that quality companies with pricing power should muddle through. Furthermore, interest rates are well behaved and increased usage of digital payments is paving the way for implementation of the Goods and Services Tax later this year. And lastly, outside of IT services, investors realize that India is fairly isolated from the protectionist rhetoric of the new U.S. administration.
In February, the Tokyo Stock Price Index advanced 0.20% in local currency terms (up 3.43% in U.S. dollar terms). The yen strengthened by 3.69% versus the U.S. dollar.
The confluence of improved domestic fundamentals, a weaker yen and continued support of equities via government purchases and corporate buybacks helped boost Japan’s equities in February. Monetary policy remains unchanged but the government had been diligent in making efforts to boost wages and improve labor markets. After several years of lackluster progress, wages are beginning to grind higher, underpinning consumption and domestic demand. The yen strengthened slightly during the month but hovers at relatively weak levels, giving added support to exporters and certain cyclical sectors. Overall Japanese equities are benefiting from moderate macro tailwinds and improved labor dynamics.
During the month, the Korea Composite Stock Price Index (KOSPI) gained 0.39% in local currency terms (up 3.90% in U.S. dollar terms). The Korean won appreciated by 3.51% against the U.S. dollar in part due to uncertainties around the U.S. protectionist policies.
Korean stocks, similar to China, were firmly higher as both macro and micro forces supported shares in February. Economic data supports expansion at a moderate pace (just shy of 3% per annum). Because of a soft global economy in recent years, South Korea needed to rely on domestic demand as a significant source of growth. If the global economy continues to improve, Korea could be a significant beneficiary as both its commodity and manufacturing based exports should rise. Pessimism surrounding the impeachment of Korea’s president has not only contributed to lower valuations but also re-ignited the corporate governance rhetoric. We believe attractive valuations, supportive disposable income growth and activism in corporate governance could support the re-rating of Korean equities in 2017.
Southeast Asian markets were mixed in February. The overall MSCI ASEAN Index was up higher 1.63%. By country, Indonesia ended the month in positive territory. The Jakarta Composite Index increased 1.76% (1.84% in U.S. dollar terms) following gubernatorial elections in Jakarta.
Even though Jakarta’s incumbent governor made it through February’s first round vote, it has forced a showdown slated for mid-April. President Jokowi is not taking chances on the gubernatorial election outcome. He is trying to create an opposition alliance to help firm up his support in Jakarta. This coalition support is important to maintain the momentum of infrastructure spending and help Jokowi with his re-election bid in 2019.
In the Philippines, strong domestic activity has increased imports and hurt the country’s external position that could lead to a widening of the trade deficit and a weaker current account. This dynamic has pressured the Philippine peso but not enough to revive exports. In Thailand, the SET Index fell 0.89% (-0.25% in U.S. dollar terms) as GDP growth for 4Q16 moderated to 3.0% YoY from lower contributions of private sector activity, due to the mourning period following the death of the Thai King. Government spending rebounded and offset the slowdown in private activity.
Malaysia’s KLCI Index returned 1.68% (1.44% in USD terms). 4Q16 GDP grew at 4.5% YoY slightly above consensus and was underpinned by resilient private consumption. Net exports also contributed positively, helped by improving manufacturing and commodity (oil & gas, CPO and rubber) volumes.
Singapore’s Straits Times Index was the most positive in the region gaining 1.81% (2.65% in USD terms). 4Q16 GDP growth was 2.9% YoY which was driven by strong manufacturing output (primarily semiconductor and pharmaceuticals). However labor market issues continue to put pressure on private consumption and on the economy.
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.