Matthews Asia Country Updates

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For the month ending June 2018

China/Hong Kong

In June, the MSCI China Index returned -5.18% and Hong Kong's Hang Seng Index returned -4.52%, both in local currency terms. China's domestic CSI300, the A share index, returned -6.99% in local currency terms (-9.99% in U.S. dollar terms). The renminbi (RMB), ended the month at 6.62 against the U.S. dollar.

Chinese shares were among the weakest in June, influenced by downside volatility in the local A-share indices. Chinese retail investors are nervous that government policy intended to de-risk the financial system will stifle China's economic growth. The Chinese government has instigated new asset management regulations that have worked to limit speculation within wealth management products and restrict access of non-bank financial companies to certain types of financing. However, it is yet to be proven that overall credit growth has been hampered enough to significantly affect consumer behavior or slow down the economy overall. In addition, corporate earnings, especially within industrial sectors, are still boasting reasonable growth. We believe the Chinese government will closely monitor the effects of its de-risking policy and make adjustments in order to not shock the system. Lastly, if trade negotiations between the U.S. and China prove to be less problematic, we would expect markets to normalize as we enter the second half of 2018.

For more on China, please read the latest issue of Sinology.


In June, the S&P Bombay Stock Exchange 100 Index returned -1.86% in U.S. dollar terms (-0.32% in local currency terms).

India's equity market was a relative outperformer among Asian markets in June (especially in local currency terms). Foreign investors have been less constructive than local market players as foreigners perceived India to be vulnerable to higher energy prices. Macro headwinds captured headlines earlier in Q2 as India's reliance on energy imports and a deteriorating current account pressured the Indian rupee and brought inflation concerns to investors, especially foreigners. In addition, political pressures stemming from the 2019 elections have foreigners speculating as to the ongoing strength of Prime Minister Narendra Modi and his ability to drive reform. On a positive note, the temporary disruption of government tax receipts caused by the implementation of the Goods and Services Tax (GST) has faded and government revenue seems back to normal. In addition, economic growth remains robust and corporate earnings momentum is improving.


In June, the Tokyo Stock Price Index returned -0.85% in local currency terms (-2.68% in U.S. dollar terms). The yen ended the month at 110.76 against the U.S. dollar.

Japanese shares were down for the second month in a row in June as tensions surrounding geopolitics and trade accelerated. This pattern of volatility carried over from May despite Japanese companies registering some of the highest return on equity figures in recent years. Foreigners were net sellers the first few weeks of June and large caps in general outperformed smaller cap stocks. MSCI Japan Index valuations fell and the MSCI Japan price to earnings ratio (P/E) now sits at approximately 13X earnings, a significant discount to many other developed markets. Going into Q3, trade friction could dampen sentiment but other positive catalysts may exist. Prime Minister Shinzo Abe is up for re-election in September and a competitive yen could support upward earnings revisions. Most importantly, the November primary elections within the U.S. could incentivize the Trump administration to back off its aggressive rhetoric regarding global trade and investment restrictions such that markets can take a breather from volatility.

South Korea

In June, the Korea Composite Stock Price Index (KOSPI) returned -6.70% in U.S. dollar terms (-3.99% in local currency terms). The Korean won declined by -3.36% against the U.S. dollar.

South Korea's equities were among Asia's weakest in June as investors contemplated how trade talks between the U.S., China and Europe could affect Korean exports and how prospects of a potentially significant hike in the country's minimum wage could affect corporate earnings. The Korean won weakened in June against the U.S. dollar along with most emerging currencies. Meanwhile, U.S. President Trump met with North Korea's Kim Jung Un on June 12, making Trump was the first sitting U.S. president to meet with a North Korean leader. Despite the historic nature of the event, the meeting seemed to have little impact on investor sentiment toward South Korean equities. One positive outcome of the summit is decreased military tensions on the Korean peninsula. Korea's domestic economy remains stable despite a rising unemployment rate and Korea's exports continue to support GDP growth. Market participants expect a very gradual increase in Korean policy rates, highlighting muted inflationary pressures and steady economic growth.

Southeast Asia

In June, the broader MSCI ASEAN Index fell -6.91% in part due to continued equity outflows from emerging markets against a background of global trade tensions and tighter U.S. monetary policy.

Thailand's SET Index dropped -10.30% (-7.58% in local currency terms). While Thailand's economy has enjoyed relative stability due to its ample current account surplus, low inflation and high international reserves, growth remained narrowly based on external demand and on the public sector, until recently. GDP data this year and recent high frequency data point to broader domestic demand contribution as spillover effects surface. However, a sustained recovery in new foreign direct investment may come only after election uncertainties have settled. Elections appear to be on course for 2019, but there remains the possibility of further delay. Equity valuations remain rich relative to the past five years and earnings momentum has begun to slow despite broadening domestic demand. That said, the defensiveness of the Thai economy in the current global environment is likely to keep equities relatively resilient.

Indonesia's Jakarta Composite Index fell -5.23% (-2.81% in local currency terms). Bank Indonesia (BI) surprised the market with a 50 basis point (0.50%) interest rate hike that raised the reverse repo rate from 4.75% to 5.25%. The market was looking for a more measured 25 basis points (0.25%) increase. BI reiterated its intent to be pre-emptive and ahead of the curve. The central bank raised policy rates by 100 basis points (1.00%) cumulatively since May and if it stays in lockstep with the Fed through the year, it would suggest the potential for another 50 - 75 basis points (0.50% - 0.75%) by the end of 2018. Regional election results are a welcome indication that progress has been made since the Jakarta election last year, with voting trends moving away from religious and ethnic issues—a positive development for investor sentiment.

The Philippines' PSEi Index decreased by -5.23% (-3.92% in local currency terms). The Philippines' central bank hiked interest rates by 25 basis points (0.25%) to 3.5% for a second consecutive meeting following a 25 basis points (0.25%) increase in the prior month. Besetting the Philippines has been higher inflationary pressures, from higher wages, inflated rice prices, as well as pass-through effects from excise taxes hikes implemented under the tax reform package. Higher inflation expectations have catalyzed interest rates to rise by 140 basis points (1.40%) in the past year and caused weaker stock market sentiment. A rice reform bill shifting to a tariff-based system from a quota system, if passed, is expected to bring down inflation in the second half of 2018 (rice is a key component of the CPI basket).

Source: Bloomberg

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.