Matthews Asia Country Updates

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For the month ending July 2017

China/Hong Kong

In July, the MSCI China Index returned 9.00% and Hong Kong's Hang Seng Index returned 6.64%, both in local currency terms. China's domestic CSI300, the A share index, returned 2.79% in local currency terms (3.42% in U.S. dollar terms). The renminbi (RMB), ended the month at 6.73 against the U.S. dollar.

Chinese equities listed in Hong Kong posted some of the strongest returns for the second straight month following June’s MSCI announcement regarding the inclusion of China A-shares into its indices beginning in 2018. There were several announcements following the Chinese National Financial Work Conference held in July. For example, the PBOC reiterated the need to “proactively” prevent financial risks in the foreseeable future; the foreign exchange regulator announced that it would maintain a crackdown on FX irregularities to maintain stability in the currency market; the insurance regulator said it would step up supervision over insurers asset and liability management to limit “risky activities”; and the CSRC wants to improve trading suspension management to maintain market order and protect investors’ rights. In addition, domestic optimism has been underpinned by a surprisingly robust economy and buoyant property sector, which has broadened outside the economic hubs of Beijing, Shanghai, Shenzhen and Guangzhou and into regional tier two and tier three cities.  Moderate wage increases and the wealth effects of appreciating real estate prices continue to support the Chinese consumer.
Strong wage growth, low household debt, mild inflation and consumer optimism resulted in real retail sales growth of 9.3% in 1H17, compared to U.S. real retail sales growth of 2.1% during the same period. The rebalancing of the Chinese economy continued, with consumption accounting for 63.4% of GDP growth in the 1H17, up from a 44.7% contribution during the same period in 2010.


In July, the S&P Bombay Stock Exchange 100 Index returned 6.89% in U.S. dollar terms (6.15% in local currency terms)—marking some of its most notable gains for the year as India’s new Goods and Services Tax (GST) was implemented more smoothly than anticipated. The country also saw annual monsoon rainfall that has been within normal ranges and markets were further bolstered by news that the central bank (RBI) may cut its base interest rate, which supports lower borrowing costs for corporations. Stock prices pushed higher, especially within the energy, telecom and financials sectors, despite a lackluster corporate earnings environment and somewhat stretched equity valuations. Strong investor inflows into Indian fixed income markets combined with moderating inflation have helped to keep interest rates low, allowing for increased government spending, which has helped to offset relatively weak manufacturing trends. The perceived benefits of GST include a higher tax-to-GDP ratio and seamless trade across the country, which may help companies become more efficient. It also signals a shift toward favoring organized businesses within the formal tax-paying economy.


In July, the Tokyo Stock Price Index returned 0.42% in local currency terms (2.19% in U.S. dollar terms). The yen ended the month at 110.41 against the U.S. dollar.

Japanese stocks continued to grind higher in July despite the fact that Prime Minister Shinzo Abe’s approval rating has been slipping substantially over the last two months and despite the Bank of Japan’s admission that its ETF purchases have “distorted the market.” The Abe administration is trying to deflect attention away from the festering political scandal and toward issues driving the economy. Japan’s macroeconomic environment has been favorable with GDP growth being revised upward as domestic demand, manufacturing PMI and consumption continue to track broadly higher. The significant output gap (excess supply and lack of demand), which has plagued Japan for two decades has finally disappeared. Japanese companies are feeling capacity shortages and a tighter labor market. Lower unemployment, combined with growing corporate earnings, should support higher wages and domestic consumption. Overall, Japan’s macro risks continue to fade. Should Abe’s political support begin to improve, the combination of an improved domestic economy and reasonable foreign demand may support fundamentals going forward.

South Korea

In July, the Korea Composite Stock Price Index returned 2.34% in U.S. dollar terms (0.46% in local currency terms). The Korean won rose by 2.24% against the U.S. dollar.
South Korea’s equity market remained firm and the new government, headed by President Moon Jae-in, has been positive for investor sentiment as corporate governance, increased domestic consumption, social welfare, job creation and increased fiscal stimulus are all targets of improvement. Investors have embraced new policies and Korean stocks have posted some of Asia’s strongest results year-to-date through July 2017. Market sentiment is running high in South Korea, but risks include prolonged weakness in Chinese demand for certain Korean products; returned downward pressure on oil prices; and the risk that President Moon’s aggressive agenda could be watered down—especially in the area of fiscal stimulus and government spending.

Southeast Asia

In July, the broader MSCI Southeast Asia Index returned 2.46% and YTD has returned 18.76%. External demand continued to be robust and helped Singapore's Straits Times Index gain 3.35% (and 4.88% in U.S. dollar terms). Singapore however continued to display a two-speed economy with its external sector continuing to track higher and its domestic sector lagging. On a year-on-year basis, Singapore's non-oil domestic exports rose by 8.2% in June. 
For the Philippines Composite Index, the market gained 2.32% (and 2.26% in U.S. dollar terms). During the month, President Rodrigo Duterte gave his second State of the Nation address, focusing on tax reform, the national budget, domestic security and infrastructure development. His approval rating rose to 82% as reported by local media, and given such strong ratings, the president appears to have tailwind to pass the comprehensive tax reform package, which would be positive for tax revenues and the infrastructure development effort.
Laggards during the month included Indonesia's JCI Index rising 0.35% (0.37% in U.S. dollar terms), Thailand's SET Index moving 0.12% (2.04% in U.S. dollar terms) and Malaysia's KLCI Index slipping 0.19% (+0.2% in U.S. terms). Indonesia experienced a noisy set of economic numbers and company results during the month due to the timing of the Lebaran holiday, however the broader picture shows patchy improvement in growth acceleration and improving stability indicators. In Malaysia, Prime Minister Najib Razak offered cash handouts to farmers under the Federal Land Development Authority in efforts to secure votes, indicating that the mid-2018 elections could be held sooner.

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.