MARKET OUTLOOK
Monthly market outlook for China and Asia region.
2017-12
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China

Overall, macro data released was slightly weaker than expected. November’s Caixin China PMI Manufacturing Index inched down marginally from 51.0% to 50.8%, while Industrial Production growth softened by 0.4% to 6.2% in October. Fixed Asset Investment (ex-rural) growth weakened to 7.3%, but remained in-line with expectation. Liquidity condition tightened; as evidenced by marginal decline in M2 growth from 9.2% to 8.8% and New Yuan Loan dropped by almost 50% to merely RMB 663.2 billion. Inflationary pressure gradually built up, with rising CPI from 1.6% to 1.9% in October, despite a relatively stable PPI level. Retail sales growth managed to stay above 10%, albeit moderately weaker than previous month.

A-shares moved up strongly in first half of November as it was rumoured that “National Team” continued to maintain a stability of the market. Although there was some marginal pull back in selective sharp out-performers, blue chips stocks remained the focus while several key leaders continued to break new high. Apart from persistent strengths in a handful of out-performers, there were signs that buying interests started to spread over to second-line leaders and very selective thematic plays. For example, a few second-line home appliances stocks moved up strongly and the solar-space shares surged on rumours that subsidies reduction may be delayed. Nevertheless, sentiment reversed by mid of the month, especially after the cautious comments from Xinhua News Agency on hefty valuation of Moutai and announcement of more tighter regulations on asset management products for financial institutions. We believed that the market was affected by cumulative effects from several negative factors, such as tighter rules on asset management products, marginal tightened liquidity from banking system since early November and lock-in of profit by institution (especially those private funds in China). Triggered by sell-off in blue-chips, small-cap and growth plays extended their weaknesses and plunged for the rest of the month. Overall, although most of the large-cap stocks gave up their early gains, they still managed to out-perform their small-cap counterparts in November. While selective out-performers in Consumer, I.T. and Healthcare spaces declined for the month, a few stocks among the Insurance, Energy and Material sectors strengthened further, bringing up the board index largely unchanged for the month.

According to comments and action being taken by government officials after the Party Congress, we strongly believe that tighten liquidity condition and stricter regulatory environment will become normal circumstances for the market in the near term. As a result, although exports may continue to benefit from moderate global recovery, slowdown in investment (due to lack of liquidity and de-leveraging) will drag on overall economic activities. Near term, we expect the markets will consolidate downward amid more profit taking will emerge approaching the end of the year.   In addition, the new rules on asset management products are in effect to speed up the de-leveraging while it will inevitably tighten the liquidity in the medium term. Hence, both the economy and capital markets will be affected, albeit the extent is not known.

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Greater China Region

Off-shore China stocks rose with the MSCI China index rising by about 1.7% m-o-m in KRW in October. Insurance rallied amid a good set of 3Q earnings results.  Healthcare, staples and banks outperformed.  IT was also strong, led by hardware and semiconductor.  Consumer discretionary and telecom lagged.   Real estate underperformed on worries of sales growth slowing down and policy headwind.  The 19th Party Congress concluded in mid-October.   The importance of quality and balance development was emphasized.   We do not expect change in policy direction, but the execution could be stronger, with continued supply-side reforms and intensified environment related production controls to improve industrial capacity utilization and reduce pollution, incrementally tighter financing conditions post the Party Congress, though at a calibrated pace, to rein in leverage, and a more institutionalized long-term housing policy framework.

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ASEAN Countries

ASEAN equity was stable at 2-year highs sustaining a low volatility uptrend since the start of the year. Cyclical sectors continued their outperformance led by financials and consumer discretionary sectors. Banks should benefit from higher interest rates and lower bad debts in 2018. Consumer spending is recovering as stronger exports percolate through to domestic demand. ASEAN equity should sustain the bull market advance for a third consecutive year in 2018. Export growth and higher commodity prices contributed to the economic recovery in 2017. The economic recovery should broaden out to the domestic economy creating more balanced growth in 2018. Current mid-cycle equity valuations have not fully priced-in faster growth prospects in 2018.