MARKET OUTLOOK
Monthly market outlook for China and Asia region.
2018-8
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China

Macro development was mixed. After approaching the psychological level of 7.0, CNY vs USD rebounded moderately after the PBOC announced the counter cyclical CNY management for the currency.  RMB stabilized and softened by merely 0.2% over the month.    Domestic consumption weakened further given the Retail Sales growth in July eased from 9.0% to 8.8%, 4 consecutive months of below 10%. Despite rumours of loosening, FAI in July grew at 5.5%, 0.5% lower than previous month, while industrial production growth stayed flat at merely 6.0%, shy from market consensus.  With most macro data pointed South, Manufacturing PMI and Non-Manufacturing PMI in August improved marginally.   Exports and Imports growth in July were stronger than expected; which might be due to the fact that companies pushed forward their orders ahead of further tariff on additional amount of Chinese goods. 

 

A share markets tumbled for the month as affected by several negative development. In addition to unresolved China-US trade disputes, a few domestic issues put on additional pressure to local stocks.  In August, the vaccine event triggered a sharp sell-off among Healthcare plays. Also, new policy in the sector made investor worry about the profitability on most pharmaceutical companies.  Also, lower than expected 1H results from Yili and the break-out of African swine fever led to significant sell-off of Consumer names.  Concern of macro slowdown continued to press Industrial and Material plays; but better than expected results among insurance and property companies provided support to the Financial sector. Given investors remained highly risk adverse, large-cap stocks tended to out-performed throughout the month.    

 

Although we do not think that the cyclical fixing can give a firm support to the currency in the long run, the announcement from the PBOC could give a temporary support to CNY, which further weakness should ease near term. However, with heightening tension between China and the US, and additional tariff for Chinese goods, macro economy is likely to weaken further in coming months; which should jeopardize upcoming macro data.  Judged from recent actions from the PBOC, we maintain our view that no massive stimulus plan will be in place.  In contrast, there might be selective loosening on specific sectors or projects, which might not be able to revive the overall downtrend of the economy.  Besides all these, one of our concerns is further weakness in domestic consumption.  The default of P2P and weakened economic activities may further capture the desire of consumption. 

 

On the market side, with no significant loosening and potential further weakness in the economy, there is lack of near term catalysts for the market. Nevertheless, after dropping by more than 25% from the peak in January, significant downside of the market may be shielded.  Current situation of A share markets is lack of confidence and several adverse factors remain an overhang, such as Sino-US trade dispute and potential downside of earnings.  However, selective blue chips have retreated to more reasonable level which provides good entry level for long term investors.  We expect the market to remain in a trading range but the volatilities may narrow given the valuation of some sectors has entered into a more comfortable zone. 

Macro data signaled further softening in economic growth. While 2Q GDP growth came in as expected at 6.7%, 0.1% lower than 1Q, all other economic readings showed different levels of weakening.  In June, Industrial Production growth eased from 6.9% to 6.7%; and overall Industrial Profits dropped from 21.1% in May to 20.0%.  In particular, China’s June PMI disappointed the markets.  Manufacturing PMI weakened to 51.2, slightly lower than consensus. However, Non-Manufacturing PMI fell unexpectedly from 55.0 to 54.0, indicating further weaknesses in servicing sector. 

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Greater China Region

Greater China stocks fell last month despite government’s efforts to roll out counter cyclical measures to stabilize Rmb and economy. On the external front, currency turmoil in some emerging markets put pressure on the market.  Domestically, trade war concerns, disappointing 1H earnings of some investors’ favored stocks, etc. weighted on market sentiment.  Policy uncertainties in various sectors such as education, health care, gaming, etc. raised concerns on the growth outlook in these sectors.   Telecom had the best performance on defensive earnings and high yields.  Energy and real estate also generated positive returns on strong earnings.   As the result season comes to an end, market attention could return to the Sino-US trade war.   US may impose 25% tariff on another US$200bn of China imports, after the public-comment ends on 6th September.  Markets could continue to be in a range-bound trading mode near-term on contagion risks of emerging market financial crisis, policy and trade uncertainties, etc. with the downside supported by relatively resilient earnings and macro, policy stimulus, and undemanding valuations, etc.

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ASEAN Countries

ASEAN equities were volatile and range-bound in August. Market movements were once again dictated by macro shocks this time potential contagion from Turkey's currency crisis. Markets recovered their losses when risk of financial contagion diminished with Indonesia, Thailand and Philippines recovering the most. ASEAN markets are bottoming from a 7-month drawdown but are struggling to sustainably trend-up. Slowing growth, emerging market volatility and escalating US-China trade tensions until US mid-term elections in November impede a sustained market recovery. Persistent macro uncertainties are likely to keep ASEAN markets volatile and range-bound over the remainder of 2018.