Market review by the LO FUNDS – CONVERTIBLE BOND ASIA management team:
Global markets recovered from last month’s brief correction in August, as more signs emerged of the containment of a number of regional political conflicts. While the rebound was more driven by developed markets, Asian markets consolidated after their strong move last month. It was encouraging for emerging markets investors to see that Asian equities (MSCI Asiaex-Japan) stayed ahead of US equities (S&P 500) on a YTD basis.
During the month, the MSCI Asia ex-Japan did not move much with a gain of just 0.7% in August. Both Chinese and Hong Kong markets took a breather, after stellar performances last month. The Chinese MSCI index was largely unchanged, and the Hong Kong MSCI index corrected by -1.2%, which was attributed to profit-taking.
Ahead of Apple’s new product launch, technology companies in Taiwan were bid up, driving its MSCI index up 2.9% on the month. Turning to South Asia, it was a great month for Thailand, whose market rose 4.9% on further clarification of its political situation after General Prayuth Chan-ocha received a royal endorsement. The Philippine market continued to perform well with another 2.6% gain on its MSCI index while the Indian market was still in good shape after the election.
Although regional market performance was strong, it was notwell-supported by corporate results announcements. Indeed, over the past two months many companies in the region have reported their results which saw more earnings’ misses than beats. We have witnessed a mild trend of downward guidance revision, particularly for 2015. Regional earnings growth is still expected to reach 12.6% YoY in 2014.
Looking deeper into sector breakdown, it is interesting to note that the strongest growth sector was utilities, followed by industrials and health care. The utilities sector is now expected to grow its earnings by 71.8% YoY after very sharp earnings revisions within the sector over the past three months. Up to now, the recent market upturn in Asian equities does not look like a typical cyclical upturn since it has been driven by defensive sectors, with health care, utilities and telecoms leading the way. For a fully-fledged recovery, we would expect such positive sentiment to spread to more cyclical sectors.
On the economic front, new data releases suggested that activity remained slightly soft in North Asia. In China, the new credit data was a negative surprise, with social financing (TSF)1sharply down from RMB 1,970bn a month ago to just RMB 273bn in July. Many economists believe that these highly volatile figures do not suggest a trend, and expect abounce-back in August.
While the case for a Chinese slowdown is unclear, the Hong Kong economy has turned weaker beyond any doubt. Its Q2 GDP growth figure was released as 1.8% YoY, which was softer than expected, clearly dragged down by a sharp reduction in Chinese visitors.
The growth of economies of South Asia appeared much clearer, with the Philippines sustaining GDP growth of 6.4% in Q2. However, inflation also picked up more in July, driven by higher food prices.
It is not clear whether the rising price trend will stay, but its central bank has already started to take pre-emptiveaction by raising interest rates.
Finally, in India, the new Prime Minister, Modi, faced a first test of his ability as a court declared that some coal-miningallocations made since 1993 were unlawful and arbitrary. There will likely be some impact on selective companies. The next hearing will be held on 9 September, but the final ruling is still expected to take a long time.
Lately, many analysts have started forecasting that the US Fed will start to raise interest rates earlier than previously thought. So far, Asian markets have not reacted negatively. It is not clear yet whether or by how much the rate hike has already been priced in. Some sell-side strategists now suggest that emerging markets do not necessarily go down on rising US interest rates. Their argument is that early rate rises usually signal stronger growth, but expensive markets with high current account deficits are to be avoided. Although we are still less optimistic on the impact of rising interest rates on regional economies, we tend to agree that cheaper markets with better economic support should do better going forward.
