Europe’s sovereign debt problems have continued to weigh on sentiment despite better than expected economic data from the U.S. As a result, most regional indices fell this month, with the MSCI AC Asia Pacific Free Index including Japan and the MSCI AC Asia Pacific ex Japan Free Index declining by 6.73% and 8.13%, respectively, during the review period.

The TOPIX fell in November, decreasing 4.7% on the month. As repercussions from the Greek debt crisis spread to Italy and Spain within the Euro zone, their sovereign debt yields started to rise to unsustainable levels and resulted in a broad equity market sell off. Within the Japanese equity market, the TOPIX fell to a new low for the year to date as a number of companies announced downward revisions to their earnings projections. Towards the end of this month, the equity market rallied, supported by positive news of the International Monetary Fund's financial support for Italy and surprisingly solid figures for U.S. retail sales. Due mainly to investors’ risk aversion, most sectors declined this month, not only the economically sensitive stocks but also the domestic sectors too.

For the Japanese economy, Japan's real gross domestic product (GDP) growth rate for the third quarter of 2011 turned positive at 6.0%, year-over-year (yoy) supported by a production recovery and some improvement in consumer sentiment. Now that production output has been restored to pre-disaster levels, the GDP growth rate for the fourth quarter of 2011 is expected to be somewhat lower. For fiscal year (FY) 2012, while ongoing concerns over Euro zone debt issues and concerns over the foreign demand environment have grown once again, commodity prices remain at high levels. Given the uncertainty, we have revised down our export and capital investment forecasts, thereby cutting the FY2012 GDP growth rate from 1.9% to 1.7%.

In our assessment, the market has already priced in the prospect of future earnings deterioration and credit risk spreads. Although we must be watchful for the possibility of a temporary future decline in share prices in the event that investors again become more risk averse, we believe an up-tick in investor sentiment will be enough to support a market rally.

MSCI China’s rebound was short-lived and the Index tumbled 8.4% during the month. China’s Purchasing Managers Index (PMI) dropped to 49 in November from 50.4 in October, with the new orders sub-index falling to only 47.8 from 50, which marks the first contraction since February 2009. Again, defensive stocks outperformed such as Telecommunication stocks and Utilities. Healthcare stocks underperformed as investors were concerned about a sharp contraction in margins.

MSCI India was the worst performer in Asia, held back by rising oil prices and coupled with policy inaction. Industrial stocks caused the biggest drag on the Index, declining 22%, while the best performing sector, Healthcare, decreased by only 6.7%. In Australia, the MSCI Index declined by 7.5%, which was led by Materials (-9.6%), Financials (-8.3%) and Energy (-8.1％).  Reserve Bank of Australia cut rates in November to 4.5% after keeping rates on hold for the past 11 months. 

Korea’s benchmark index outperformed the region slightly, declining by 6.4%, or 3.4% in local currency terms. Outperformers during the period included Consumer stocks due to their stable earnings stream. Large cap Technology stocks continued to outperform and Banks were the biggest drag on the Index as earnings missed expectations, while the quality of financial assets was expected to deteriorate further. Taiwan showed a similar trend, with a 15.9% slump in Financials dragging the overall Index down by 9.5%.

Markets in the ASEAN (Association of Southeast Asian Nations) region generally outperformed, including Thailand (-3.2%), Malaysia (-5.0%), Indonesia (-5.7%) and the Philippines (-6.2%). Singapore was the worst performer within ASEAN, declining 8.2%. Thailand’s outperformance was driven by consumer related names. Similarly, Telecommunications in Malaysia was the strongest sector for the month.

 

Market Outlook and Strategy

Extreme levels of volatility have continued to plague the global equity markets. The main underlying cause remains the ongoing situation in Europe, while there is a growing realization that an attempt to muddle through this crisis is no longer a viable option. Therefore, we can expect some sort of deal involving greater fiscal union and major austerity programs in countries with large deficits, coupled with action from the European Central Bank (ECB) and Germany to lower sovereign bond markets and stimulate the economy. Under this scenario, we believe global and Pacific Basin equity markets are likely to rally strongly into the traditionally buoyant year end. The alternative is a hitherto unthinkable break up of the Euro zone, which would result in a sharp decline in equity prices.

Although we cannot know the eventual outcome, we judge that the market has, on balance, factored in the more bearish scenario. Cash levels at institutions are relatively high, valuations are very reasonable and investor sentiment is weak. Nevertheless, support for Asian markets could come from the fresh evidence that the U.S. economy has regained some growth momentum combined with further aggressive monetary easing policies from China.

Given the current volatility and the deteriorating stock market liquidity, we are reluctant to make too many changes to our current country and sector strategies. We have remained the already underweight exposure to China despite the significant recent cut in the reserve requirement ratio (RRR) for the banks. In terms of the overall economic prospects, we remain reasonably confident of a soft landing, but we also have major concerns about the quality of listed companies in China, their motivation for listing and the huge future pipeline of capital raising activity. This latter point appears to overwhelm any positive case for buying Chinese equities based on their low valuations. Our question is therefore: if stock valuations are so cheap, then why are insiders still selling them so aggressively?

We also maintained our overweight exposures to both Korea and the smaller ASEAN markets. These smaller markets have large domestic populations that render them more insulated from the turbulence of the global economic environment. We also remain committed to Korea despite the perception that the economy is highly correlated with OECD (Organization for Economic Cooperation and Development) industrial production. While this is a concern, many 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.

 

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. 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.

 

 

The MSCI information contained in this material may only be used for your internal use, may not be reproduced or redisseminated in any form and may not be used as a basis for or a component of any financial instruments or products or indices. None of the MSCI information is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such. Historical data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. The MSCI information is provided on an “as is” basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating any MSCI information (collectively, the “MSCI Parties”) expressly disclaims all warranties (including, without limitation, any warranties of originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages.

 

Investments are not FDIC-insured, nor are they deposits or guaranteed by a bank or other entity.

 

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