Matthews Asia Country Updates

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For the month ending May 2019

China/Hong Kong

In May, the MSCI China Index returned -13.16% and Hong Kong's Hang Seng Index returned -8.46%, both in local currency terms. China's domestic CSI300, the A share index, returned -5.97% in local currency terms (-8.29% in U.S. dollar terms). The renminbi (RMB), ended the month at 6.91 against the U.S. dollar.

Chinese equities suffered as U.S.—China trade negotiations were seemingly derailed in early May and both sides escalated their rhetoric, bringing significant uncertainty about the timing of a resolution. Implications of higher tariffs on a broad set of consumer goods as well as a potential disruption to supply chains pressured most global equity markets, emerging and developed alike. Investors feared the chances of a resolution in the short term were fading and that the best hope is for negotiations to restart when Trump and Xi meet at the G-20 summit in late June. In the meantime, investors worried about the long-term implications of unresolved trade issues, including a slowdown of the world's largest economies and knock-on effects to company earnings. An optimist could argue that the market has already discounted significant uncertainty and that Chinese policymakers stand ready to further stimulate their economy if need be—which should minimize the tail risk of a meaningful negative economic shock to China.

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


In May, the S&P Bombay Stock Exchange 100 Index returned 2.00% in U.S. dollar terms (1.99% in local currency terms).

Indian equities were flat in May, significantly outperforming other Asian and emerging markets. National election results were announced May 23 and the ruling National Democratic Alliance (NDA) led by Prime Minister Narendra Modi won a strong mandate. In fact, the NDA won 353 of the 543 available seats, outperforming even the most-optimistic estimates and beating its results in the 2014 national elections. India remained outside much of the tariff controversy and could benefit from movement of Chinese manufacturing. Lower oil prices eased pressure on India's current account and the lack of inflationary pressure created room for the Reserve Bank of India (RBI) to be accommodative if need be. On a cautionary note, Indian equity valuations already reflected optimism surrounding the election results. In addition, recent economic results highlighted a slowing pace of GDP growth, especially in private-sector investment.


In May, the Tokyo Stock Price Index returned -5.55% in local currency terms (-2.89% in U.S. dollar terms). The yen ended the month at 108.29 against the U.S. dollar.

Japanese equities suffered alongside most Asian markets due to escalating U.S.—China trade tensions, especially in relation to a talked-about increase in auto tariffs—with a potential direct impact on Japanese dealers. Other areas of concern included the planned value-added tax (VAT) hike due to take effect in October, select earnings disappointments and the threat of slower global GDP growth. That said, Japanese shares already reflected a reasonable amount of pessimism, especially in terms of price-to-earnings (P/E) and price-to-book (P/B) ratios. Interestingly, should the trend continue, announced stock buybacks and dividend payouts could reach levels not seen since the Global Financial Crisis, which could support return on equity (ROEs) going forward.

South Korea

In May, the Korea Composite Stock Price Index (KOSPI) returned -9.33% in U.S. dollar terms (-6.85% in local currency terms). The Korean won declined by -1.91% against the U.S. dollar.

South Korean equities were among the region's weak performers as investors feared the U.S.—China trade dispute would indirectly affect South Korean companies. Although the U.S. may not impose tariffs directly on South Korean exports, select South Korean firms may be subject to second-order effects in terms of their participation in the supply chain of certain China-related exports to the United States. South Korean stocks were caught up in the overall negative sentiment related to global trade and a potential slowdown in global growth.

Southeast Asia

In May, the broader MSCI ASEAN Index returned -3.80% as trade tensions caused weakness in regional markets.

Indonesia's JCI Index fell -3.30% (-2.65% in local currency terms). With the election now out of the way and Jokowi having clinched a 56% majority, it is likely that private investment activity will pick up during the second half of the year. This is likely to be supported by anticipated interest rate cuts as lower inflation and a more accommodative Fed would give Bank Indonesia (BI) the opportunity to ease monetary policy following 175 basis points (1.75%) of hikes in 2018. In addition, renewed uncertainty over China—U.S. trade may lead to greater inflows into more domestic-oriented economies such as Indonesia, supporting liquidity and enabling a stronger credit impulse. Policy focus on social welfare spending in 2019 should also drive stronger multiplier effects in the domestic economy, but consumption may face headwinds over the second half of this year if the government moves to (partially) dismantle fuel subsidies, leading to direct pass-through of global oil prices and putting a dent in disposable incomes. That said, the recent fall in oil prices may allow the government to cut subsidies without affecting consumers.
The Philippines' PSEi Index returned -0.22% (0.51% in local currency terms). Results of mid-May elections in the Philippines for 12 senators, congressmen and local officials signaled a strong mandate for President Rodrigo Duterte. While these midterm elections garnered far less international attention compared to other recent regional elections, they were seen as a check on the president's popularity and thus, as an early proxy for the 2022 presidential election. The most recent uptick in Duterte's popularity in opinion polls may be related to easing consumer price index inflation, which moderated to 3% year over year in April 2019 after peaking at 6.7% year over year in mid-2018. This was largely enabled by the Duterte administration's success in passing the rice tarrification bill, which increased supplies of rice and led to lower pricing for this food staple. In addition, moderating inflation has allowed the central bank to cut the reserve requirement ratio (RRR) for banks by 200 basis points (2.0%) to 16%. The Bangko Sentral ng Pilipnas (BSP) also cut the policy rate by 25 basis points (0.25%) to 5% with more cuts likely in the second half of this year—a positive development for domestic liquidity, which should be supportive of credit growth and the Duterte Administration's infrastructure agenda.
Thailand's SET Index decreased by -1.80% (vs. -2.80% in local currency terms). On May 25, Thailand's Parliament convened for the first time since its March elections. The pro-military party's candidate, Prayut Chan-ocha was elected prime minister by Parliament and the party (PPRP) is likely to form a coalition government, as has been widely expected. The military's comeback, albeit under a more democratic guise, should ensure policy continuity so long as the multi-party coalition hangs together. With the U.S.-China trade war having escalated once more, additional stimulus measures including cash transfers, income tax cuts and a minimum wage hike are likely to be deployed soon after the new government takes office. This could provide a lift to consumer stocks, consumer lenders and property developers. The central bank recently noted darkening prospects for the Thai economy, pointing out that “the Thai economy will grow at a slower pace than the previous assessment.” With the Bank of Thailand lacking the flexibility seen in other ASEAN economies to cut interest rates, the clear message is that fiscal policy changes will be required for reform.

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.