Monthly market outlook for China and Asia region.

Supported by persistent external recovery and seasonal effect (New Year in Jan last year), trading activities were much stronger than expected in January. Jan imports surged 36.9% YoY compared to just 4.5% gain in previous month, while exports growth also strengthened further from 10.9% to 11.1%. Inflationary pressure also eased amid the high base from last January during the Chinese New Year holiday. Jan CPI softened to 1.5% (1.8% in Dec), and PPI inched down by 0.6% to 4.3%. Liquidity condition did not loosen much even ahead of New Year holiday. Aggregate credit growth and TSF growth slowed down, but the new bank loans rose sharply to new high at RMB 2,900 billion; partly indicating that banks were striking to shift their assets from WMP/ shadow banking activities to normal lending channels. The latest NBS Manufacturing PMI reported 3-straight month decline, weakened to 50.3, lower than market consensus.  Non-manufacturing PMI was also weaker than expected, dropping for the first time in 4 months to 54.4.  Overall, macro data pointed towards a potential peaking-out of this round of rebound.


Domestic stock markets plunged in early month as led by systematic correction in the US markets; and then rebounded sharply just before the New Year holiday as backed by strong expectation on good set of results from blue-chip names and potential supportive policies from NPC meetings in early March. Nevertheless, style rotation became obvious after the New Year Holiday. Investors tended to take profit from out-performers and switched into laggards and thematic plays.  Large-cap stocks retreated as led by decline in Financial (mainly property and banks) and Consumer (mainly home appliances and liquor) names.  Apart from concern of slowdown in economic growth as reflected from weaker than expected PMI data, the lower than expected results preview by Robam Appliances triggered worries of too high in forecasts for most blue-chip counters.  In addition, rumours of possible roll out of property tax dampened sentiment towards property names.  On the other hand, the postponement of registered system for IPO and supportive policies for innovative technology development boosted sentiment towards thematic and growth plays, which bounced back sharply in the last few days of trading.  Sector-wise, Financial, Energy and Consumer Staples tumbled for the month, while I.T. and Telecom stocks bucked the trend and posted positive gains in February.   

Although we may see weaker trading activities in February due to holiday effect, strong global demand will remain supportive of China’s trade growth. Although near term inflation data may edge up on strong consumer demand for both food and services during the holiday season, high base effect in 2017 will make overall inflation this year manageable, in our view.


For the upcoming NPC meetings, it will present major personnel changes in key economy and finance positions. The potential new PBOC governor will likely to reiterate “deleveraging” and “financial regulation” as the top priorities. Although the proposal to remove the presidential term limit may trigger additional thoughts on future development of political environment in China, it facilitates the implementation and continuation of policies, which is positive to long-term economic development.

Regarding stock market development, we do not think that small-cap and thematic plays can take the lead ahead due to still high in valuation. In addition, high uncertainty in earnings outlook will continue to capture magnitude and sustainability of the rally in these spaces. Subsequent to recent correction, selective large-cap stocks retreat to more reasonable level. However, we admit that after the significant rise last year, some blue-chip names remain unattractive from valuation perspective. Hence, we need to see more strong and sustainable earnings data, which will give raise another round of re-rating for large-cap plays. Consequently, we likely see more consolidation for the stock market in the near term.

Greater China Region

Greater China stocks consolidated by about 3.8% m-o-m in KRW (or down 5.1% m-o-m in USD) in February after the strong rally in January as well as last year amid increasing global market volatility.   The flash sell-off in early Feb was led by systematic correction in the US but the market subsequently rebounded on a good set of earnings results and intact fundamentals. The market consolidated again during the month end with investors awaiting NPC meeting results and the relatively hawkish US Fed statement.  Barring any major surprises from the NPC meeting and/or external fronts (e.g. worsening of trade wars, etc.), we maintain our view that Greater China equities would continue to trend upward this year on upward earnings revisions, positive profit alerts, mid-cycle valuations, continued fund inflows, etc.  Greater China equities fundamentals are still intact with central banks’ policy normalization processes remaining gradual. 

ASEAN Countries

ASEAN markets were more volatile in February as central banks may need to hike rates more quickly in response to rising inflation. However, market declines were mostly recouped as economies and earnings continue to grow robustly. Cyclicals outperformed defensives despite heightened risk aversion: Energy and Financials over Consumer Staples and Telecom. Market expectations have shifted from the Goldilocks economy of above-trend growth, below-tend inflation to a Reflationary scenario of both above-trend growth and above-trend inflation. Higher market volatility notwithstanding, asset reflation is equity-positive as long as central bank rate hikes are gradual and growth expectations are realized. The market return target of 20% for 2018 would be enhanced by accumulating periodic market corrections over the course of the calendar year.