Pacific Basin Market Overview - April 2012
Nomura Asset Management
Signs of a faltering economic recovery and fresh concerns about the prospects for indebted European countries ensured a relatively flat equity market performance in April, even in the Pacific Basin region. The MSCI AC Asia Pacific Free Index including Japan declined by 1.00% while the MSCI AC Asia Pacific ex Japan Free Index edged 0.40% higher.
The Tokyo Stock Price Index (TOPIX) retraced the previous month’s gains in April, falling by 5.9% in local currency terms. Economic data from the U.S. had a major impact on sentiment. U.S. employment statistics for March showed that the growth of non-agricultural employment had stalled, breaking the optimistic mood that had prevailed in the U.S. market and dragging stock prices lower. Minutes of the Federal Reserve’s meeting released in early April were also disappointing for investors expecting further monetary easing measures to stimulate the U.S. economy. In Europe, the latest data indicated that some countries were heading back into recession, raising questions about the feasibility of fiscal restructuring for such countries. Moreover, debt concerns in the Euro zone resurfaced this month with weak bidding for Spanish government bonds and rising bond yields that triggered further risk avoidance. Deteriorating external conditions contributed to a rebound in the Japanese yen against both the U.S. dollar and the Euro, which effectively overshadowed some positive events such as the announcement from the Bank of Japan at the end of April that it would implement additional monetary measures.
Japanese economic indicators released in April showed a continued output recovery but hinted that the recovery pace was decelerating. Industrial production in March rebounded from an unexpected decline in February, advancing by 1.0% month-over-month (mom). This output recovery was mainly driven by a solid recovery among transportation equipment companies helped by the introduction of subsidies for fuel-efficient cars and increased exports to the U.S. Nevertheless, this recovery could lose momentum over the coming months. The Current Survey of Production indicated output growth of 1.0% (mom) in April, but a decline of 4.1% (mom) in May, suggesting the production rebound following the supply-chain disruption caused by floods in Thailand could quickly fade. External demand appeared healthy. Exports in March grew by 5.9% year-over-year (yoy) as solid demand from the U.S. continued to bolster the overall figure, although faltering demand from Europe and Asia was a negative factor. Meanwhile, the modest recovery in domestic demand continues. Real consumer spending in March advanced for the second consecutive month, rising by 3.4% (yoy).
Export-oriented sectors including Automobiles and Electronics were generally weak during the review period in the context of unstable overseas conditions and the strengthening yen. The Commodities sector was subdued too due to concerns about a slowdown in the global economy. Meanwhile, the Financials sector continued to suffer profit-taking pressure. In contrast, defensive sectors such as Telecommunications and Medical were relatively stable amid the sluggish market. Consumption stocks also performed steadily alongside a recovery in domestic demand.
MSCI China Index gained 3.5% during the month, led by Information Technology (+7.7%) and Financials (+5.2%). MSCI Hong Kong Index appreciated by 0.6% on gains from Financials (+2.0%) while Industrials (-3.3%) and Information Technology (-16.3%) underperformed.
MSCI India Index declined by 4.7% and was the worst performing market this month. The weakest sectors were Telecommunication Services (-14.1%), Information Technology (-10.5%) and Industrials (-10.0%). On the other hand, consumer stocks (both staples and discretionary) outperformed, gaining approximately 3%. MSCI Australia gained 1.9% for the period, led by defensive sectors such as Telecommunications (+8.1%) and Real Estate Investment Trusts on expectations of further rate cuts, while the Energy sector (-0.3%) lagged behind.
MSCI Korea Index ended flat during the period, gaining just 0.1%, with Consumer Discretionary (mainly autos, +8.9%) and Information Technology (6.4%) stocks leading the gains. On the other hand, Healthcare (-12.6%) and Materials (-9.5%) were the worst performers for the month. Meanwhile, technology stocks in Taiwan underperformed and declined 5.4% in April while the MSCI Taiwan Index dropped 4.2%. Other sectors that underperformed included Industrials (-7.0%) and Consumer Discretionary (-5.4%).
In the ASEAN (Association of Southeast Asian Nations) region, country performances were mixed with the Philippines (+2.7%) and Thailand (+2.6%) gaining the most. Singapore (+0.1%) was flat while Malaysia (-1.1%) and Indonesia (-0.9%) registered losses. In the Philippines, the Financials (+3.6%) sector was the best performer while Consumer Discretionary (-2.6%) held the market back. In Malaysia, stocks that were considered to have political links were sold down while defensive stocks such as Telecommunications (+2.0%) performed well. Similarly, Telecommunication Services in Indonesia did well.
Market Outlook and Strategy
In April, risk-averse sentiment prevailed throughout the global financial markets amid fresh concerns about the prospects for European sovereign debt. Recent economic indicators have presented mixed signals, with signs that the Western economies are at a standstill together with a recovery for Asian industrial countries. Our outlook for global economic growth remains reasonably optimistic, and financial markets in the near future will be highly dependent on monetary policy. In the developed economies, we believe the authorities will probably take additional easing measures. The Chinese economy still lacks strength, but new lending has shown strong growth since March. Our outlook for China has not changed, and we expect the economy to head towards a gradual recovery in the second half of the year, supported by the policy response.
We have upheld a reasonably optimistic outlook for global growth and the stock market in this region. We are comfortably positioned, with a growth bias at this moment in terms of sector allocation.
In terms of countries, we will keep an underweight position in China. The ready supply of new stock issuance could remain a key factor depressing market performance despite our view that the economy is close to bottoming out. We should look for bottom up opportunities to provide a strong basis for an increase in exposure here.
We still like the smaller ASEAN markets of the Philippines, Thailand, and Indonesia. Markets here are no longer cheap but we feel all three are still in a secular re-rating phase, benefiting from higher economic growth and strong domestic consumption.
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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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