Matthews Asia Country Updates

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For the month ending February 2018

China/Hong Kong

In February, the MSCI China Index returned -6.36% and Hong Kong's Hang Seng Index returned -6.00%, both in local currency terms. China's domestic CSI300, the A share index, returned -5.90% in local currency terms (-6.55% in U.S. dollar terms). The renminbi (RMB), ended the month at 6.33 against the U.S. dollar.
Chinese equities finally posted losses amid the government’s efforts to balance reasonably strong economic growth with the desire to further deleverage risky sectors within the economy. Chinese equities were also negatively influenced by the sudden increase of U.S. interest rates; China’s plans to reduce the fiscal deficit target (a potential threat to higher GDP growth); China’s announcement to abolish term limits for the presidency; and renewed fears of U.S.-China trade tensions. Regarding the abolishment of presidential term limits, one interpretation is that Xi Jinping wants to consolidate power and break tradition of abiding by informal term limits as the head of the Party (a post which is much more powerful than the presidency). This action thereby creates uncertainty about how future leaders are chosen, increasing long-term political uncertainty and “key-man” risk. However, we do not see this action having any significant impact on near-term economic activity or policy decisions. For more on China, please read the latest issue of Sinology.


In February, the S&P Bombay Stock Exchange 100 Index returned -6.88% in U.S. dollar terms (-4.70% in local currency terms).

Indian stocks were weak in February and have lagged behind global emerging markets in 2018. A relatively more sanguine environment for corporate earnings has been offset very recently with macro concerns. Market participants are skeptical that fiscal deficit targets will be honored since 2019 will be an election year and most market watchers are expecting increased government spending. Secondly, February news headlines included a significant public sector bank scandal, a creation of a new long-term capital gains tax on investments and worries about higher oil imports prices and their effect on inflation. Local interest rates have risen dramatically in 2018, increasing speculation that the Indian central bank (RBI) will need to increase policy rates to curb inflation pressures. The bottom line is that although corporate earnings seem to be pointing to a generally improving economy, short-term macro headlines are dampening sentiment, which has pressured Indian equities.


In February, the Tokyo Stock Price Index returned -3.70% in local currency terms (-1.33% in U.S. dollar terms). The yen ended the month at 106.73 against the U.S. dollar (USD).

Japanese stocks were down but also were relative outperformers within the region. Local equity returns reflected the weakness of most major developed markets but USD returns were boosted by a relatively strong yen. The domestic economy continues to benefit from stronger exports (especially toward China) and reasonable wage growth, allowing for a moderate hike in both producer and consumer prices, which has supported earnings growth in Japan. Although the valuations of Japanese equities remain relatively attractive versus other developed markets, recent price gains are making it more difficult to find attractively priced small- and mid-cap companies.

South Korea 

In February, the Korea Composite Stock Price Index (KOSPI) returned -6.55% in U.S. dollar terms (-5.42% in local currency terms). The Korean won declined by -1.41% against the U.S. dollar.

South Korea’s equity market has been subject to increased volatility in the past several months, although it has roughly followed the same trends as global emerging markets. Domestic growth remains stable and Korean exports continue to be robust, boosting the country’s current account surplus and foreign exchange reserves. Market participants expect a very gradual increase in South Korean policy rates, highlighting muted inflationary pressures and steady economic growth. The four-year term of current South Korea’s current central bank governor ends March 31, 2018 and the market is anticipating that President Moon Jae-in will appoint a successor in coming weeks.

Southeast Asia

In February, the broader ASEAN market continued its slide amid the global equity sell-off that started in late January before mostly recovering and ending -1.44% lower for the month.

The Philippines PSEi Index was the weakest performer, falling -3.21% (and -4.58% in U.S. dollar terms) around concerns of a record monthly trade deficit of US$4 billion1 and inflation surprises. The national inflation reading for the Philippines came in at a three-year high of 4.0%2 in January, stoking inflation fears over higher oil prices and tax reform impacts. The month also saw its central bank (BSP) sending mixed signals as it announced a 1 percentage point cut in the country’s bank reserve requirement ratio to 19%, which injected liquidity into the economy. The BSP noted that this move is intended to move toward a more market-based implementation of monetary policy.
During the month, Singapore’s STI index was down -0.36% (and -1.23% in U.S. dollar terms). Singapore announced an expansionary 2018 fiscal year budget that may be a positive contributor to growth. The anticipated increases to the Goods and Services Tax (GST) were largely deferred, easing concerns over a potential slowdown in the recovery of developing private spending. The GST increase of 2 percentage points,3 moving from 7% to 9%, would be implemented between 2021 and 2025. The budget also saw the establishment of a rail infrastructure fund with a US$3.8 billion (S$5 billion) injection for major rail infrastructure projects such as the Singapore-Kuala Lumpur high-speed rail.
In February, Indonesia’s JCI Index was mostly flat in local currency terms, however, expectations of higher-than-expected Fed Funds Rate increases contributed to the weakness in the rupiah, and U.S. dollar returns were lower by -2.92%. A US$151 billion Indonesian rupiah-denominated (IDR) bond inclusion to the Bloomberg Global Aggregate Index during 2Q184 should see bond inflows and support for the IDR in the near term. 

Sources: Bloomberg unless otherwise noted

Philippines Statistical Authority
Singapore Ministry of Finance
The Business Times

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.