MARKET OUTLOOK
Monthly market outlook for China and Asia region.
2018-5
58a26333a6659
China

Overall economic activities seemed to soften further recently. 1Q GDP growth marginally eased from 6.9% to 6.8%, in line with market consensus.  While Manufacturing PMI and Non-Manufacturing PMI growth came in-line with estimates, both Fixed Asset Investment (ex-Rural) and Industrial Production growth edged down moderately in March; from 7.9% and 7.2% to 7.5% and 6.8%, respectively.  Although consumption remained resilient (March’s Retail Sales growth inched up by 0.1% to 9.8%), Exports growth slipped significantly to -2.7%, albeit seasonal factors might have skewed the results.  CPI and PPI came in lower than expectation, indicating that inflationary pressure tamed further.

 

Although A share markets bounced back in early month, especially after President Xi jinping mentioned during the Aobo Economic Forum that China would further open up its market and strike to protect intellectual property, investors remained skeptical and expect more negotiation is needed before the two nations can settle with such disputes. In addition, concern of slowdown in economy and unexpected weaker than expected 1Q results and corporate issues from several large-cap counters dampened sentiment.  For instance, the announcement of “zero” dividend from Gree stunned the market, while weaker than expected 4Q results from Yili sent the stock much lower in April. The markets dropped across the broad and previous out-performers continued to see severe selling pressure.  Healthcare plays remained the shelter for investors. Despite high valuation and sell-off by end of the month, pharmaceutical stocks out-performed on satisfactory results announcement. While oil stocks managed to out-perform amid strengths in oil prices, Industrial plays also performed relatively better because of out-performance in defense counters for hope of higher military expenditure due to tightened geopolitical tension.  I.T. stocks continued with their weaknesses amid further downward revision in Apple’s sales.  Consumer discretionary sectors dropped significantly due to profit taking from several large-cap home appliances and auto stocks. 

 

Given the Chinese government seems to have higher tolerance in lower growth this year, there may not be any meaningful stimulus policies for the macro side even if we see further weaknesses in the economy. Combined with strong commitment in de-leveraging and controlling of total risk, we expect macro data to show further weaknesses in coming months. Although the trade dispute between China and the US is not likely to be resolved soon, improved communication between the two nations and intention to solve the issue via negotiation should cool down the volatile market. Moreover, easing of geopolitical tension, especially after the meeting between leaders of South Korea and North Korea, may give a temporary release for equity markets near term. However, rising number of weaker than expected 1Q results from large-cap companies would capture any rebound of blue-chips stocks.   On the other hand, the issue of official rules and regulations on asset management products could release the concern of negative impact to equity markets. In particular, the extension of transition period from mid-2019 to end of 2020 indicates that more time will be given to financial institutions to clear up the improper products within the system, which should reduce the risk of dis-orderly sell-off in equity markets in the near term.   We hold the view that cyclical stocks, such as financials and material names may be affected by slowdown in economy. Unlike most of the sell-side recommendations, we tend to avoid healthcare stocks near term given most of them trade at very high valuation. After the recent correction, we think that investors may re-visit small-cap and thematic names given these stocks have under-performed the broad markets over the last year.

map_gcr
Greater China Region

Greater China stocks consolidated by about 0.1% m-o-m in KRW (or down 0.4% m-o-m in USD) in April.   Taiwan stocks led the decline, dragged by weak 1Q results and/or 2Q guidance of tech stocks due to iPhone weakness and conservative view on cryptocurrency.  HK stocks outperformed within Greater China as banks reacted positively to rising HIBOR and Macau gaming stocks gained on GGR beats.   Off-shore China stocks finished flat m-o-m, supported by solid 1Q economic figures/corporate earnings despite rising concerns over US-China trade tensions.  Market consolidation is largely driven by sentiment at the moment.  We expect market volatility will continue near-term and the results from the upcoming senior US government delegation to China will be closely monitored.  The market does not expect the trade tensions to be resolved soon.  Thus further upward re-rating potential of Greater China equities could be capped.  However, solid corporate earnings growth should provide upside for the market unless a fully-fledged trade war happens and leads to downgrades of corporate earnings and economic outlook.

map-ac
ASEAN Countries

ASEAN markets were volatile for the second time this year caused by higher interest rates and liquidity tightening. US long-bond yields rose to 3% prompting a sell-off in capital markets and currency depreciation. Indonesia and Philippines capital markets once again bore the brunt of fund outflow. Similar to the US rate-driven drawdown in February 2018, market corrections are not expected to turn into a bear market. It is still too early to price-in the end of easy money and growth fundamentals should remain intact. However, the market’s trend is likely to have shifted from upward to range-trade over the next few months as positive revisions and higher multiples are less likely under volatile capital markets. Market returns of 20% are still possible in 2018 but market timing and mean-reversion strategies need to be employed to accumulate 10% price corrections.