Improving expectations for global economic growth underpinned a solid start to 2013 for the Asia Pacific equity markets. In Asia, interest focused on China, as economic data showed further signs of recovery. On the other hand, the depreciating Japanese yen drew concerns that Asia’s main exporters, which include Korea and Taiwan, will become relatively less competitive. The MSCI AC Asia Pacific Free Index including Japan gained 3.0% while the MSCI AC Asia Pacific ex Japan Free Index closed 2.6% higher during the month.
The Tokyo Stock Price Index (TOPIX) posted a strong 9.36% rally in local currency terms in January as the weakening Japanese yen continued to support the earnings prospects of the export oriented manufacturing sectors. A general improvement in investor sentiment worldwide also appears to be supporting the global equity markets. While the sovereign debt conditions in Europe have shown little progress lately, negotiations in the U.S. Congress led to the passage of a compromise law to mitigate the negative impact of the expiration of tax reductions. Improvements in labor market and housing conditions in the U.S. also helped to support a more positive outlook.
The ongoing slide in the value of the yen since the general election in December continued into the New Year as the new Liberal Democratic Party (LDP) administration convinced the markets of its clear focus on reflationary fiscal and monetary policies. In response to concerted political pressure, the Bank of Japan (BOJ) announced that it would raise its target Consumer Price Index (CPI) growth rate to 2% from its previous “inflation goal” of 1% and announced the introduction of an open-ended asset purchasing program at its latest monetary policy meeting in January. While the decisions appeared to have limited direct impact on current deflationary conditions, the market now expects further monetary easing policies when incumbent BOJ Governor Shirakawa is replaced in April. Meanwhile, the third quarter earnings reporting season started from the end of January. These results and the fourth quarter projections are not likely to show a substantial turnaround from the trend observed at the first half results, as the benefits of the weaker yen and the shift in government policy could prove limited in the near term.
Cyclical industry sectors continued to contribute to the robust performance of the Japan equity market. In particular, the Automobile sector rallied alongside a recovery in U.S. demand and a rising market share for Japanese manufacturers. The Financials sector also outpaced the other sectors as it still offers attractive valuations and its earnings prospects may improve as economic conditions recover, while the value of the bank’s stocks holdings have increased along with the recent recovery in the Japan equity market. In the meantime, the Medical sector also produced a robust performance in January as reports of new drugs developments lifted investor sentiment.
The MSCI China Index (+4.1%) continued to outperform the market, led by Utilities (+10.5), Information Technology (+10.0%) and Financials (+7.5%) while the Telecommunications (-4.6%) sector weighed on the index. Similarly, the MSCI Hong Kong Index (+5.8%) outperformed, with Telecommunications (-2.2%) lagging behind while the outperformance was driven by Financials (+6.6%) which include Real Estate (+6.9%) and Consumer Discretionary (+6.2%).
The MSCI India Index (+5.0%) outperformed in January, largely due to the reversal of previous losses in the Information Technology sector which gained 17.3% during the period. Telecommunications (+11.4%) and Energy (+10.8%) outperformed while Utilities (-0.7%) and Materials (-0.5%) were the worst performing sectors. The MSCI Australia Index closed 5.5% higher with all sectors recording gains.
The MSCI Korea Index (-4.1%) underperformed the rest of the region on concerns that the weakening Japanese yen and strengthening Korean won will hurt its export market. Export sectors such as Information Technology and Consumer Discretionary/Autos declined by more than 5%. Engineering & Construction companies also underperformed amid concerns about overseas margins. On the other hand, Telecommunications Services (+4.1%) and Utilities (+1.5%) outperformed. The MSCI Taiwan Index (0.2%) was flat against the market. The strongest sector in Taiwan was Financials, which gained 2.9% during the review period.
The ASEAN (Association of Southeast Asian Nations) regional markets recorded gains with the exception of Malaysia (-4.8%), which was the worst performing market in January. Malaysia’s underperformance was mainly due to concerns that the ruling coalition may lose parliamentary seats in the upcoming elections. The Philippines (+7.7%) emerged as the top performer in Asia and Thailand (5.8%) outperformed during the period.
Indonesia (+2.2%) underperformed the broader market. Singapore (+1.4%) was the worst performer in the ASEAN region as index heavyweights such as Financials and Real Estate underperformed on the back of government measures to tighten the property market.
Market Outlook and Strategy
Our outlook for the global economy remains constructive, particularly for the U.S. and emerging markets. As we have stated previously, the pace and extent of the recovery will be less impressive than in the past, chiefly because OECD (Organization for Economic Co-operation and Development) governments and consumers continue to de-leverage, while China’s demographics suggest the long awaited rebalancing from fixed-asset investments to consumer demand is now beginning in earnest. However, economic growth may improve and could fuel faster profit growth in the Pacific Basin region. When combined with reasonable valuations and plentiful liquidity, we anticipate another good, albeit volatile, year for Pacific Basin equities. Markets have rallied strongly in the past few months and we believe investor sentiment has become too exuberant. As such, we expect to see some near term consolidation before the markets move higher.
In terms of country allocation, we are reducing the weighting of Korea and Taiwan positions. In Korea, we have become concerned about the slowing domestic economy, high consumer leverage, and policies to support domestic consumers at the expense of listed companies. Several Korean stocks appear vulnerable to the ongoing yen weakness.
In terms of Taiwan, the list of negatives is growing. Taiwan faces poor demographics and an ongoing hollowing out of the economy including uninteresting domestic sectors such as banks and property, rising labor costs for Taiwanese plants operating in China, and finally valuations that look relatively high for smaller and more innovative companies.
The proceeds from these sales will likely be reinvested in Hong Kong and Thailand, while we have also added to our China position. The Hong Kong economy is starting to rebound on the back of improvements in China. This should benefit the Retail sector. Macau gaming companies will also be aided by the upturn. Finally we still like the Property sector. The Hong Kong government’s approach to controlling prices is to increase supply rather than limit demand, as in Singapore. This should enable property stocks to generate continued earnings growth.
Thailand is already our one of the largest overweight positions and the market has been very strong. However, we feel that the market has further to run. Valuations are still attractive, there are strong monetary and fiscal tailwinds and local investors are major participants, which helps to cushion the market from external shocks.
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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