MARKET OUTLOOK
Monthly market outlook for China and Asia region.
2017-10
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China

Despite marginal contraction in Industrial Production growth from 6.8% to 6.7% in August, Industrial Enterprises profit growth surged to 24% (the highest in 3 years), indicating that corporates profits were driven up by strong prices from supply-side reform. Hence, both CPI and PPI edged up from 1.4% and 5.5% to 1.8% and 6.5%. Both domestic and external demand improved. New order index rose to 54.8 from 53.1, and New export order index went up to 51.3 from 50.4. Year-to-date, retail sales growth remained steady at 10.4%, unchanged compared to previous month. While China’s NBS Manufacturing PMI surged to 52.4 in September, Caixin’s PMI readings fell to 51.0 from 51.6 last month, indicating that the gap between large and small-to-medium sized firms widened further, partly due to deepened negative impact on smaller companies from more stringent environmental protection measures.

 

In September, A-share markets hovered in a narrow trading range with no clear direction. In addition to pending the upcoming Party Congress, investors were skeptical about the resilience of economy, despite the fact that most of economic data stayed resilient. Given there was lack of particular strong representative sectors, investors adopted very short-term trading strategy, which made sector rotation become more obvious. Although cyclical stocks moved up in early month, the pull back of most metal prices (driven by future markets) dampened sentiment. Since most cyclical plays recorded significant gains year-to-date, investors locked in profit by selling off all cyclical names across the board. Investors switched their focus back to defensive shares such as Consumer-related and Healthcare plays. Triggered by rumours of earlier commercial launch of 5G operation, Telecom-related counters rallied by end of the month. Despite reasonable valuation, Financial stocks also declined across the board on deteriorating sentiment and ahead of long National Holiday.  

 

Although PBOC announced a directional reduction of RRR to commercial banks that have certain percentage of their lending for micro businesses (e.g. smaller than RMB 5 million), we do not think that it is a signal of loosening (although near term excess liquidity could be up to RMB 500-700 billion from this cut). In fact, it is merely a measure to strengthen the assistance to small businesses and alleviate part of funding pressure to smaller banks. Given overall economy remains in a stable and healthy shape, there is little chance to see meaningful loosening by end of the year. However, we believe that the overall economy should remain healthy. In addition to support from infrastructure spending (strong rise in PPP projects since 2Q), on the back of strengthening PMI data in the U.S. Euro and Japan, we expect external demand to maintain resilient in the next few months. However, given tight environmental protection rules remain intact, rising input costs may pose potential downside risks for further improvement in production and demand.  

Near term, the performance of property sales and domestic consumption during the National Holiday may dictate short-term market sentiment, especially when we are pending of the Party Congress. Regarding the upcoming 19th Party Congress, we expect the risk control for financial sector would be re-affirmed. Apart from personnel changes at the top level, there may be chances of more clear pictures on SOEs reform. Otherwise, we do not expect much from the meeting itself.   We expect liquidity condition remains neutral. Margin financing balance has shrunk recently and probably indicates that investors tend to lower their risk preference. Hence, large-cap stocks as a whole may out-perform near term. However, based on 3Q preview announced so far, selective small-cap company’s earnings are expected to strengthen up further from the 1H, which should provide support to small-cap universe, should there be any correction.    

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Greater China Region

Greater China stocks rose by about 1.1% m-o-m in KRW in September, led by China stocks again. Chinese consumer staples, real estate, materials, consumer discretionary, etc. led the gains.  Real estate, materials, etc. reported strong 1H earnings while consumer staples showed signs of margin bottoming out.   Taiwan was the worst performing market within Greater China as there was selling in tech on fears of worse-than-expected iPhone 8 sell through.  In HK, the strong Macau gaming performance was largely offset by the weakness in telecom, insurance, utilities, etc.   We remain constructive for Greater China equites as earnings momentum remains positive and valuations are undemanding.  However, the upward thrust year-to-date might weaken going into year-end.  Market volatility could increase heading into 4Q on a number of macro events such as US Fed balance sheet normalization, US interest rate hikes and tax cuts, Catalan independence uncertainties, party congress results in China, HK’s new Chief Executive’s policy speech, etc. 

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ASEAN Countries

ASEAN markets rose 1.4% sustaining at 2-year highs. The market’s advance was led by Thailand especially retailers and energy stocks. Thai retailers are expected to report faster same-store sales growth supported by policy stimulus ahead of elections in 2018. Energy stocks rose from higher oil prices in anticipation of OPEC maintaining production caps in 2018. ASEAN capital market volatility could increase in 4Q17 on higher bond yields and USD strength from US policy change: earlier-than-expected rate hike in December 2017, central bank balance sheet tapering and tax cuts. Stock market corrections however should be accumulated since underlying fundamentals are expected to remain intact, namely, faster non-inflationary growth in 2018 supporting the market uptrend from bear market lows since January 2016.