Matthews Asia Country Updates
For the month ending April 2019
In April, the MSCI China Index returned 2.17% and Hong Kong's Hang Seng Index returned 2.25%, both in local currency terms. China's domestic CSI300, the A share index, returned 1.11% in local currency terms (0.77% in U.S. dollar terms). The renminbi (RMB), ended the month at 6.73 against the U.S. dollar.
Chinese equities rose in April but lost momentum in the latter half of the month as Chinese economic data was stronger than expected. It may seem counterintuitive, but markets interpreted stronger-than-expected data as a potential excuse for China's policymakers to back off stimulative actions put into place earlier this year. The modest increases in spending for infrastructure, combined with lower reserve requirement ratio (RRRs) and value-added taxes (VATs), successfully improved sentiment and helped to boost economic activity year to date. One note of caution is that recent strong economic releases incorporate a slightly extended seasonal Chinese New Year that makes year-on-year data appear slightly stronger than it would be otherwise. Chinese corporate earnings remain relatively robust and valuations continue to be some of the most attractive for emerging markets, even after the year-to-date rally in equity markets.
For more on China, please read the latest issue of Sinology.
In April, the S&P Bombay Stock Exchange 100 Index returned 0.11% in U.S. dollar terms (0.50% in local currency terms).
Indian equities were slightly higher in April but underperformed other major Asia markets and broad emerging markets. Small- and mid-cap stocks underperformed their large-cap counterparts. Stocks were somewhat volatile during the month as economic releases were slightly weaker than expected. The Indian central bank (RBI) cut policy rates by 25 basis points (0.25%) early in April and many economists think another cut may occur in June. One potential constraint for further rate cuts could be the recent acceleration in consumer prices and the rebound in oil prices. Oil prices are worth watching as the spike last September helped perpetuate a weaker Indian rupee and fears of higher current account deficits. All eyes are on the national election results, which should be announced late May. Most market participants expect another Modi/BJP-led government.
In April, the Tokyo Stock Price Index returned 1.65% in local currency terms (0.92% in U.S. dollar terms). The yen ended the month at 111.42 against the U.S. dollar.
Japanese equities were broadly higher in April. Strength in other developed markets, especially the U.S., along with stimulative Chinese policy and stronger economic data in the U.S. and China, supported Japanese shares. Japanese stock valuations remain attractive but earnings momentum is still under scrutiny by market participants as profit margins continue to be squeezed by rising fixed costs, including those relating to the higher cost of labor. Interestingly, the first quarter of 2019 saw one of the strongest periods in recent memory for announced stock buybacks, which should support return on equity (ROE) going forward. The new Emperor of Japan took the throne on May 1, 2019.
In April, the Korea Composite Stock Price Index (KOSPI) returned 0.55% in U.S. dollar terms (2.94% in local currency terms). The Korean won declined by -2.82% against the U.S. dollar.
South Korean equities were some of the better performers in the region as a pickup in sentiment and economic data within China and the U.S. supported Korean assets. The Korean won pushed toward the weaker end of its 12-month range as speculators looked toward an offset to weaker exports. Some participants expect the government to release a stimulative supplementary budget to help support economic activity
In April, the broader MSCI ASEAN Index returned 2.46%. Indonesia's JCI Index returned 0.48% (0.05% in local currency terms). The preliminary results of the presidential election indicated that incumbent President Jokowi not only won, but can claim victory by a wider margin than he did in the 2014 election. On securing a second term, Jokowi may act rapidly on policy reform. Preliminary discussions have started within the government on key policy reforms to revise the labor law, introduce a new productivity-based mechanism for setting minimum wages and progressively dismantle existing energy subsidies. Fuel subsidy reform and minimum wage reform are likely to come first, in our view, given the recent increase in oil prices and the fact that reforms over setting the minimum wage can be accomplished by ministerial regulations. Minimum-wage reform could help increase Indonesia's competitiveness in attracting foreign direct investment (FDI) into labor-intensive, export-oriented industries. Labor reform would require legislative approval, hence, we believe this may commence only after the new parliament convenes in November.
Malaysia's KLCI Index returned -1.36% (-0.03% in local currency terms) during the month. The Malaysian government announced in April that it would revive the controversial construction of Malaysia's principal Belt and Road project, the East Coast Rail Link, after negotiating a cost reduction. Under the new terms, costs would be lowered 33% to 44 billion Malaysian ringgit (US$10.6 billion)1, with the route slightly shortened to a total of 640 kilometers. The restart of the project is not surprising given a large US$4.9 billion2 penalty that would be imposed should the project be terminated. The project is expected to resume construction in July, and should provide some upside to GDP growth as public investment has lagged given a tighter government revenue profile, particularly as China has been Malaysia's largest contributor to FDI over the past few years.
The Philippines PSEi Index returned 2.53% (0.75% in local currency terms). The government's “Build Build Build” infrastructure investment program maintained momentum in 2018, with pubic investment rising 37% year over year.3 As a percentage of GDP, public investment rose by a full percentage point to 5.4%.4 The achievement of the current administration of President Rodrigo Duterte in raising infrastructure spending is notable compared to that of the previous administration, when public investment averaged 2% to 3% of GDP. It is also worth noting that the acceleration has occurred with minimal support from Chinese-funded Belt and Road investments. With interest rates likely to ease on the back of policy rate cuts in 2019 (following increases of 200 basis points last year) and lower required reserves in the banking system, private investment is also likely to ramp up. This will likely keep pressure on the current account deficit, although falling inflation should help to maintain a positive real interest rate differential with U.S. dollar rates. Headline inflation eased for a fifth consecutive month to 3.3%5 in March this year from the prior year, with the average falling within the central bank's 2% to 4% target.
Sources: Bloomberg; South China Morning Post; The Straits Times; PhilStar Global
1 The South China Morning Post
2 The Straits Times
3, 4 PhilStar Global
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.