Pacific Basin Market Overview – October 2011
Nomura Asset Management
November 14, 2011
Relief that the European Union might have reached an agreement on measures to contain the sovereign debt crisis, together with stronger-than-expected macroeconomic data from the United States, helped to drive equity markets higher in October. The corporate earnings season kicked off with most companies reporting numbers that were broadly in line with market expectations. Most countries within the region recorded gains, with the MSCI AC Asia Pacific Free Index including Japan and the MSCI AC Asia Pacific ex Japan Free Index advancing by 7.65% and 13.21%, respectively, during the monthly review period.
The Japanese equity market ended the month of October almost unchanged.Concerns about Europe’s sovereign debt crisis and a slowdown in the global economy initially sent the index sliding to a new year-to-date low at the outset. Subsequently, the Japanese stock market rebounded along with a steady retreat from the excessive investor pessimism surrounding overseas economic conditions.Positive U.S. economic indicators, including unexpectedly strong employment figures, housing data and solid gross domestic product (GDP) growth, boosted market confidence. Meanwhile, unease about the eurozone sovereign debt crisis was allayed to some extent following an agreement among European governments on measures to tackle the crisis.
Meanwhile, Japanese economic indicators released in October showed that the recovery in output appeared to be losing momentum due to faltering overseas demand. Industrial production in September unexpectedly revealed a sharp decline of -4.0% month-over-month (mom), mainly due to a slump in machinery output in the context of weak overseas demand. Meanwhile, the survey of production forecasts indicated a moderate output recovery over the next two months, with projected growth rates of 2.3% (mom) in October and 1.8% (mom) in November. Export-oriented sectors including Capital Goods, Electronics, and Automobiles achieved relatively steady performances in October, reflecting an improvement in investor perceptions of global economic conditions. The outperformance of the Communication sector was due mainly to a surge of the country’s main iPhone carrier, which reported robust earnings results. In contrast, domestic demand related sectors such as Infrastructure and Consumption, as well as the defensive Medical sector, underperformed due to profit taking pressure following a period of outperformance amid the market downturn.
The earnings reporting season for the first half of the fiscal year ending March 2012 has started and many Japanese companies have reported solid results. Nevertheless, estimates for the second half have been downgraded, mainly due to the rising yen and uncertainty about global demand. Thus, the Corporate sector excluding financials so far expects to see aggregate recurring profits decline by around 15% for the fiscal year. However, the current P/B ratio (Price-to-Book ratio) of 0.92 is close to the bottom seen just after the Lehman crises in 2009, while Japanese companies have also steadily reduced their breakeven sales levels, so the market offers attractive upside potential during an eventual recovery.
The MSCI China Index rebounded strongly, climbing 15.13% during October after months of underperformance. Investors focused on value stocks, which have been beaten down recently. China’s Purchasing Managers’ Index (PMI) buoyed sentiment as it improved in September, driven by new export orders. Inflation eased too, with Consumer Price Index (CPI) trending down to 6.1% in September. Materials posted a strong rebound. The Financial sector outperformed, shrugging off concerns over the shadow banking system. Property stocks also outperformed as the discount to revised net asset value was pricing in a huge decline in property prices. The MSCI Hong Kong Index gained 12.41%, benefiting from expectations of policy shift in China. Domestic consumption remained strong, as retail sales grew 29% in August. Unemployment in Hong Kong reached 3.2% in September, a 13-year low. Inflation in Hong Kong continued to surprise on the upside, adding 5.8% due to strong housing and food prices. Macau stocks rebounded from earlier declines and property stocks outperformed along with a recovery in primary sales.
The MSCI India Index gained 8.47% in October. Optimism was fuelled partially by indications from the Bank of India that there would be a pause in rate hikes as inflation moderates. The Consumer Discretionary sector outperformed, which mainly consists of automobile stocks. IT services continued its uptrend after posting strong quarterly results amid strong demand for IT services and the benefits of rupee depreciation. In Australia, the MSCI Index gained 17.0%, boosted partially by the Australian dollar, which appreciated by 9.16%. Increasing risk appetite drove the outperformance of cyclical stocks, so the Resources and Energy sectors were among the best performers.
The MSCI Korea Index gained 15.08%. Stocks that have lagged behind recently and were sold down heavily, including Shipbuilders, Energy and Chemical stocks, rebounded strongly this month due to their attractive valuations and expectations of a recovery in demand. Technology stocks should benefit from a weakening Korean Won. On the other hand, traditionally defensive sectors such as Consumer Staples and Telecommunications underperformed. In Taiwan, the overall rebound was softer with the MSCI Taiwan Index gaining only 6.85%. Technology stocks in Taiwan, which make up a huge percentage of the index, did not enjoy the same gains as their Korean counterparts, as many such stocks are exposed to PC demand, which remains weak.
Market performances in the ASEAN (Association of Southeast Asian Nations) region were mixed, with Malaysia (12.36%) and Thailand (12.44%) outperforming Singapore (10.45%), the Philippines (10.00%) and Indonesia (8.28%). Inflation in Indonesia eased to 4.61% year-over-year (yoy), and Bank Indonesia surprisingly cut interest rates by 25 basis points to 6.5%. The Indonesian Rupiah depreciated by 0.71% over the month. Materials and Energy stocks reversed the declines made in September and were the best performers. Floods in Thailand dominated headlines in October. Bank of Thailand reduced its GDP forecast to 2.6% this year to take account of the impact of widespread flooding. Banks in Thailand generally underperformed, as investors were cautious about the impact of the current floods on earnings. The Monetary Authority of Singapore reduced the slope of its policy exchange rate band to ease currency appreciation. GDP growth slowed to 1.3% quarter-over-quarter (qoq). Industrials stocks pared losses a month before and their share prices surged in October along with a rally in oil prices, which could help to drive future order momentum.
Market Outlook and Strategy
Asia Pacific markets remain extremely volatile. Market sentiment will continue to depend crucially on perceptions of how successful the authorities are in dealing with the debt issues in the southern European economies. While we are listening intently to the expert analysis on this issue, it is extremely difficult to arrive at a clear assessment of the end game to this crisis. Moreover, with stock market liquidity low, the market impact costs of making adjustments to client portfolios has risen along with the danger of volatile and unpredictable price swings.
Under current circumstances, we are still comfortable with our long-standing country overweight positions, focusing on the smaller ASEAN countries in terms of market size. They have large domestic populations that render them more insulated from the turbulence of the global environment.
We also remain committed to Korea despite the perception that the economy is highly correlated with OECD (Organization for Economic Co-operation and Development) industrial production. Although this is a concern, Korean companies have been very adept at expanding their market share and diversifying sales into developing economies. Stocks here are cheap and, in our view, corporate governance is improving.
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MSCI AC Asia Pacific ex Japan Index is an unmanaged free float-adjusted market capitalization index that is designed to measure the equity market performance in the Asia Pacific region excluding Japan. The Tokyo Stock Exchange Price Index (TOPIX) is an unmanaged capitalization weighted measure (adjusted in U.S. dollars) of all shares listed on the first section of the Tokyo Stock Exchange. One cannot invest directly in an index. P/B ratio is a ratio used to compare a stock's market value to its book value. Book value is the total asset of a company minus total liability.
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