Pacific Basin Market Overview - October 2012
Nomura Asset Management
November 15, 2012
Equity markets derived support this month from improved U.S. economic data and an impression that China’s economy might be bottoming out. In addition, the Euro Area Industrial Production numbers came in above consensus. The MSCI AC Asia Pacific Free Index including Japan declined by 0.39% while the MSCI AC Asia Pacific ex Japan Free Index gained 0.44% in October 2012.
The Tokyo Stock Price Index (TOPIX) appreciated by 0.7% in local currency terms in October. Japanese equity prices strengthened during the middle of the month when the yen began to depreciate. Heightened Market expectations of additional monetary easing measures from the Bank of Japan (“BOJ”) led to the yen’s retreat from its recent highs. The BOJ decided to expand its asset purchase program later in the month, a move that was in line with the consensus. Meanwhile, concerns about the economic prospects for China and the U.S. supported the positive sentiment. China released healthy economic indicators such as exports, retail sales, and industrial production, while U.S. data suggested housing investment could be bottoming out.
Despite nascent expectations of a global economic rebound, tepid economic activity worldwide has continued to dampen Japanese exports, which decreased by 10.3% In September, the steepest drop since the earthquake in March 2011. Besides, industrial production declined by 4.1% month-over-month (mom) in September, falling short of the consensus forecast. In particular, production volume for transport equipment manufacturers plunged. Meanwhile, there are some positive signs for the outlook. Surveys of manufacturers suggested an output decline of 1.5% (mom) in October would turn into an increase of 1.6% (mom) in November. On the other hand, domestic demand figures seem likely to disappoint based on annual comparisons, as consumption strengthened after the March 2011 earthquake. Real consumer spending in September decreased by 0.9% year-over-year (yoy), following seven consecutive monthly increases.
In response to improving business prospects, including more favorable currency rates and healthier global demand, the cyclical Capital Goods, Commodities, and Automobiles sectors outperformed after underperforming for the past half year. In contrast, stable domestic demand led sectors, including Consumption, Telecommunications and Information Technology, underperformed. Our sector allocation strategy is unchanged. Valuations are attractive, with an average Price-Book Ratio (P/B) ratio of far below 1.0, which appears to incorporate pessimistic economic conditions. Therefore, once global demand bottoms out clearly, their share prices can outperform and make up for the previous losses.
China was the best performing market in Asia this month, closing 5.69% higher amid signs of a recovery. September’s official Purchasing Managers’ Index (PMI) rose modestly to 49.8 (versus 49.2 in August), while cyclical sectors such as Industrials (+9.9%), Materials (+8.2%) and Banks (+8.1%) took the lead and defensive sectors (Telecommunications, Utilities, Consumer Staples) underperformed. Banks in China reported better-than-expected results, helped by low and manageable levels of non-performing loans (NPL) coupled with stable net interest margins despite interest rate liberalization efforts. Fixed-Asset Investment related stocks were back in favor due to their attractive valuations coupled with the latest up-tick in the PMI numbers. The shipping sector was one of the best performing sub-sectors as companies stopped reporting losses. The MSCI Hong Kong Index ended 1.42% higher, largely due to the Consumer Discretionary sector which gained 3.3%. The Index was held back by real estate stocks after the government introduced more cooling measures.
The MSCI India Index underperformed (-3.87%) in October as the positive influence of reform talks started to wane as the month progressed. All sectors recorded losses, with Utilities (-7.4%), Information technology (-5.8%) and Energy (-5.4%) posting the largest declines. The MSCI Australia Index closed 2.64% higher, helped by Telecommunications (+5.3%), Industrials (+4.4%) and Financials (+3.2%), amid accommodative financial conditions. The Reserve Bank of Australia (RBA) cut the cash rate by 25 basis points to 3.25%. Mergers and acquisitions (M&A) activity was also buoyant this month.
The MSCI Korea Index declined by 2.89% over the period, led by Industrials (-6.9%), Materials (-6.8%) and Consumer Discretionary (-6.2%) stocks. Automobile stocks were also weak as third quarter earnings missed estimates due to labor strikes and growing concerns about the appreciating Korean won. In the MSCI Taiwan Index, losses were seen across all sectors, sending the Index 6.11% lower, largely due to weak corporate earnings. Industrials (-8.4%), Financials (-8.2%) and Materials (-7.7%) were hit hardest. In addition, most technology firms issued cautious outlook projections for the fourth quarter given the traditional low season.
The ASEAN (Association of Southeast Asian Nations) regional markets recorded mixed results in October, with the Philippines (+2.79%), Indonesia (+2.60%) and Malaysia (+2.38%) markets all outperforming, while Thailand (-1.72%) and Singapore (-1.57%) lagged behind.
Market Outlook and Strategy
Our overall market outlook is finely balanced this month. On the negative side, our Investment Policy committee has marginally downgraded our forecasts for the developed economies over the next 12 months, while we also believe third quarter corporate earnings and revenues, particularly in the U.S., could disappoint investors. On a more positive note, monetary conditions globally remain extremely accommodative and equity valuations, both globally and within the Asia Pacific region, look cheap – especially when measured against bond yields. Perhaps most importantly, we are now seeing tentative signs that the Chinese economy might have bottomed out, after several economic statistics for September revealed positive surprises.
We have reduced the degree of overweight exposure to Korea since this market faces certain headwinds. Many stocks are geared towards global growth, which the evidence suggests will be anaemic in 2013, and earnings have generally disappointed. Unlike other markets, there is no yield support either. The Korean won is starting to appreciate relative to the yen and finally the three candidates for the Presidency are all looking to curb the influence of the chaebols, business conglomerate structures. Nevertheless, we believe there are some world-class companies that can still justify their significant overweight positions in our portfolios.
Meanwhile, we have increased exposures to Hong Kong. We have utilized the weakness associated with the government’s latest measures to cool property prices to add to our position in property stocks. Despite government efforts, rising inflation and low interest rates may continue to fuel buoyant property prices and bank lending in an environment where equities still appear to offer good value. We are also seeing growing pressure on Hong Kong’s dollar currency peg, which just heightens the excess liquidity.
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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.
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