Monthly market outlook for China and Asia region.

Latest macro data showed that China’s economy was in good shape while overall growth remained steady, albeit a marginal slowdown in selective areas. Instead of slowing down, the 2Q GDP growth remained unchanged at 6.9%, 0.1% better than expected. Year-to-date, Industrial Production growth edged up by 0.2% to 6.9%, and Fixed Asset Investment (ex-rural) stayed unchanged at 8.6%, but marginally better than consensus. Thanks to improving end demand from both external and domestic markets, Exports and Imports growth in June went up sharply, from 8.7% and 14.8% to 11.3% and 17.2%, respectively. However, Manufacturing PMI and Non-manufacturing PMI slightly weakened in July, indicating that industrial activities may soften in coming months.


Investors remained inclined to large-cap stocks rather than growth plays for better earnings certainty, albeit obvious rotation between large-cap plays among different sectors throughout the month. Consumer stocks and selective I.T. plays, which led the market rally in the first-half, suffered from heavy profit taking despite of good interim results. Investors became more diversified in July. Aggressive buyers continued to chase up cyclical plays on expectation of strong interim and full year results, while conservative players switched into banks for their low valuation and gradual improving profitability. Overall, Materials, Financial, Energy and Industrial sectors out-performed and all other sectors reported negative return MoM.  


In light of better than expected underlying macro conditions and stringent tone from the China’s National Financial Work Conference on risk control and deleveraging, we do not expect any further meaningful loosening in the second-half. While the overall growth should maintain at above 6%, the momentum would likely moderate steadily throughout the next 6 months. Infrastructure spending might recovered mildly amid rising PPP orders. However, the overall growth would be lower than 1H 2017. Although consumption remain resilient while exports seems to be in good shape amid external recovery, potential slowdown in property investment remains a threat to 2H growth. Owing to lack of further loosening, we believe that liquidity would remain neutral to marginal tight. Hence, there will be little chance for any significant market rally in the near term. Nevertheless, supply-side reform and bottoming out of end demand would support earnings recovery, in particular to selective sectors and individual stocks. Thus, we hold our view that individual sectors/ stocks would provide alpha and absolute return for the next 6 months.

Greater China Region

Greater China stocks rose by about 3.3% m-o-m in KRW (up 6.3% m-o-m in USD) in July, led by China stocks. Properties, IT, materials, etc. outperformed among off-shore Chinese stocks on positive profit alert, upbeat 2Q earnings, etc.   Both HK and Taiwan stocks generated positive returns in local currency.  In HK, despite the strong performance of financials on strong earnings results, Macau gaming and HK properties lagged on mixed 2Q earnings results and slower residential sales/property prices respectively.  In Taiwan, there was rotational buying into laggard plays and profit taking in large-cap outperformers.   We are still positive on the market as China’s macro conditions prove to be more resilient than the market had expected.  There was solid support from earnings beats and continued southbound fund inflows should continue to support the market.  The weak USD is generally positive for Greater China equities performance.

ASEAN Countries

ASEAN markets were flat at 2-year highs in July. The Financials sector performed the strongest especially Singapore and Philippine property stocks. Property sales volume in Singapore grew 72% in 1H17 and is a likely precursor for higher property prices. Property prices have fallen 12% since 3Q13 and buying momentum returned after tightening measures were eased in March 2017. Philippine office demand is supported by growth of online gaming. ASEAN is presently in the sweet spot of faster prospective growth and benign inflation. Market corrections are buying opportunities until interest rate expectations rise with inflationary pressures. ASEAN markets should also be relatively resilient since returns have lagged and foreign fund inflows to ASEAN so far are lower than other emerging markets.