Pacific Basin Market Overview
Nomura Asset Management
June 14, 2011
Europe’s sovereign debt woes and inflation fears have plagued the Asian equity markets recently, sending most indices lower during May. The eventual withdrawal of the Federal Reserve’s quantitative easing (QE2) policy also became a real concern for the markets. The MSCI AC Asia Pacific Free Index including Japan fell 2.3%, while the MSCI AC Asia Pacific ex Japan Free Index declined 2.5%.
Japan’s post disaster market downturn continued in May, but mainly due to negative international factors this time. Meanwhile, domestic concerns about the ongoing negative impact of supply-chain disruption on manufacturers’ earnings and the political disarray caused by a divided parliament and a weakened prime minister have continued to weigh on the market.
The Tokyo Stock Price Index (TOPIX) in May extended its losses, declining by 1.7% in local currency terms. U.S. economic indicators, such as surprisingly weak employment figures, exacerbated the global sense of unease about the U.S. economy and undermined the Japanese market too. Higher Chinese interest rates and Europe’s sovereign debt crisis also damaged investor sentiment. Although a majority of manufacturing companies had chosen not to announce earnings forecasts for fiscal year 2011 due to uncertainty about the aftermath of the disaster, these companies reported strong earnings results in the context of growing demand overseas. Other factors also helped to alleviate these concerns, such as a more stable Japanese yen and announcements that automakers might be able to increase production in the second half of this fiscal year.
Economic indicators revealed in May demonstrated signs of a moderate recovery in production from the earthquake. Industrial production in April clearly indicated a recovery in output from the sharp decline in March, gaining 1.0% month-over-month (mom). Nevertheless, other sectors continue to suffer from the repercussions of the disaster. Production of electrical components and information and communication equipment declined by 12.7% (mom) and 17.2% (mom), respectively, due to supply chain disruption. However, production forecasts indicate a steady recovery in output. Domestic demand remained lackluster. Real consumer spending in April extended its decline of a seventh consecutive month, declining by 3.0% year-over-year (yoy).
Decreasing share prices of electric power companies continued to detract from the Infrastructure sector’s performance in May. The Commodities sector declined too due to weakening resource prices. In contrast, the Automobiles sector posted the strongest gains due to growing optimism about production following announcements from automakers confirming good progress in their attempts to restore production output back to pre-disaster levels.
Australia and India underperformed by the widest margins this month, with their indices declining by 5.5% and 4.4%, respectively. The Australian dollar depreciated against the U.S. dollar as commodity prices fell. Financial stocks caused the biggest drag on the Australian market as credit growth tapered off, while downward pressure on fee and commission revenue continued. On the other hand, rotation into defensive stocks allowed the Telecommunication sector to outperform. In India, the Automobile, Materials, and Telecommunication sectors were the biggest underperformers.
China outperformed the region this month with the MSCI Index staying relatively flat (-0.3%). Headwinds remain as economic numbers suggest a slowdown in the economy; the manufacturing Purchasing Manager’s Index (PMI) fell to 52.0 in May from 52.9 in April and industrial production decelerated. However, retail sales remained strong and grew 16.5% (yoy) in April, contributing to the outperformance of consumer stocks. Industrials were the worst performers, leading to a loss in investor confidence. Hong Kong also outperformed the region. However, real estate stocks underperformed as the Residential sector faces policy risks.
In Korea, the MSCI Index declined by 3.5% after having outperformed over the last few months. The Financial sector led the decline due to regulatory risks. Most technology stocks also declined in reaction to pessimistic management guidance based on the demand outlook. On the other hand, gaming related stocks outperformed as operating data was much better than expected. Export dependent Taiwan, however, remained relatively flat (-0.4%). At the sector level, the Consumer Discretionary sector led the gains, while Materials underperformed the most.
In the ASEAN (The Association of Southeast Asian Nations) region, most markets ended lower in May after posting solid performances in the previous month. Equity markets were weak in the Philippines (-4.3%), Thailand (-4.2%), Singapore (-2.6%) and Malaysia (-0.5), while Indonesia outperformed its peers, gaining 0.4% for the month. Consumer stocks in Thailand underperformed as prices of the entire polyester chain came down sharply.
Market Outlook and Strategy
Pacific Basin markets face a number of headwinds, the most serious of which are the ongoing European sovereign debt crises and the unsustainable level of both the U.S. budget and current account deficits. We uphold our existing house view that global growth will soften, and recent numbers suggest this is the most likely scenario. As a result, we believe the current period of stock market turbulence could continue throughout the summer.
In the Asia Pacific region, the domestic economic environment is a little more positive. We believe that inflationary pressures within the region are generally close to reaching their peak, which should permit an eventual easing of monetary policy when the price pressure subsides. At the same time, economic growth remains buoyant and equity valuations are approaching very attractive levels.
Therefore, our central case remains unchanged, and we expect the regional markets to resume their upward path later in 2011.
With regard to countries, exposures to the smaller ASEAN markets will remain overweight. These markets are more domestically orientated and are considered more defensive against further global turbulence. We discussed reducing the Thailand exposure given the likely nervous market conditions leading up to the General Election, but concluded that the strong fundamentals should provide protection. Further out, however, we may choose to use these markets as a source of funds.
We will keep the underweight exposure to China. Corporate governance issues have been one of the reasons for our caution and recent instances of fraud involving both New York and Hong Kong listed China shares just serve to reinforce our confidence in this strategy.
Risks and Disclosure:
International investing involves certain risks and increased volatility not associated with investing solely in the U.S. These risks include currency fluctuations, economic or financial instability, lack of timely or reliable financial information or unfavorable political or legal developments. These risks are magnified in emerging markets. Securities focusing on limited geographic areas and/or sectors may result in greater market volatility. Investing in securities issued by smaller companies typically involves greater risk than investing in larger, more established companies.
Investors should carefully consider the investment objectives, risks, charges and expenses of each Fund before investing. This and other important information is contained in the Nomura Partners Funds, Inc. prospectus, which may be obtained by contacting your financial advisor, by calling Nomura Partners Funds at 1-800-535-2726, or visiting our website at nomurapartnersfunds.com. Please read the prospectus carefully before investing.
This material contains the current opinions of the author, which are subject to change without notice. This material has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information used to compile this report has been obtained by sources deemed to be reliable, but its accuracy and completeness are not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. Past performance is no guarantee of future results.
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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