Monthly returns for February 2013 were somewhat mixed, but the Pacific Basin regional markets generally ended in positive territory this month. Outside of Asia, political instability in Italy and concerns that the Federal Reserve might begin to scale back its monetary stimulus in the U.S. led to weaker investor sentiment. Economic data from China was weak, largely due to the effect of the Chinese New Year. The MSCI AC Asia Pacific Free Index including Japan gained 1.6% while the MSCI AC Asia Pacific ex Japan Free Index closed 0.9% higher during the month. (All performance figures are based on MSCI indices in U.S. dollar terms with dividends included unless otherwise stated.)
Japan’s benchmark TOPIX index advanced for a sixth consecutive month in February, rising 3.77% in local currency terms. Global macro news was generally disappointing, weighed down by concerns over the U.S. sequester and deadlock within the Italian government. However in Japan, as the government displayed a positive attitude to joining the Tran-Pacific Partnership negotiations and finalized its nomination for the new Bank of Japan (BOJ) Governor, support for the Abe Cabinet increased. In addition, expectations of a recovery in the economy and a renewed focus on conquering deflation have supported the rally in the equity market.
We expect the Japanese economy to grow by a further 0.7% as the government’s approval for the JPY10 trillion stimulus plan should support growth for the April-June period of 2013. With a demand rush ahead of the consumption tax hike likely to occur after July-September of 2013, we believe we will see steady economic growth in Japan throughout this year. In addition, as continuous monetary easing by the BOJ is likely to drive the yen even lower, we can anticipate positive surprises in exports and corporate earnings. The economic recovery outside of Japan could support export growth, and we expect a +1.4% year-over-year (yoy) growth rate for 2013.
The Japanese stock market has continued to advance alongside expectations for an ongoing recovery. The market seems reasonably valued at current levels, so further upside is possible. In addition, overcoming deflation will be quite a hurdle, but when it is eventually achieved, it could help to fuel further expansion in market valuations. On the other hand, there is still some anxiety in the global equity market that could have an impact on investor sentiment in Japan.
The MSCI China Index underperformed (-3.9%) the region as investors took profits ahead of the upcoming National People’s Congress in March. Consumer discretionary (-6.3%) stocks were the worst hit and the Energy sector (-5.6%) also underperformed as coal stocks weakened. Defensive sectors which include Utilities (+3.2%) and Healthcare (+2.5%) outperformed during the period. In the MSCI Hong Kong Index (-0.7%), Telecommunication Services (+6.1%) was the strongest sector while the worst performer was Consumer Discretionary (-5.0%).
The MSCI India Index (-7.4%) declined the most in Asia on the back of slower growth concerns and pressure on the current account deficit. The government’s first gross domestic product (GDP) estimate for fiscal year (FY) 2013 pegs growth at 5%, which was lower than the consensus. All sectors closed lower during the period with the exception of Information Technology (+3.9%), which outperformed. Industrials (-14.9%) led the decline during the period. The MSCI Australia Index (+3.2%) outperformed during the period, led by Consumer Staples (+7.9%), Industrials (+5.2%) and Financials (+4.7%). Sectors that underperformed included Information Technology (-4.6%), Materials (-1.5%) and Telecommunication Services (-2.1%).
The MSCI Korea Index (4.6%) outperformed the region as the Japanese Yen’s weakening trend slowed down, while Korean stocks were trading at attractive valuations. Export related sectors such as Consumer Discretionary/Autos (+7.7%) and Information Technology (+6.8%) rebounded strongly. The Materials sector (-0.8%) was the worst performer in February on the back of a lackluster growth outlook. Similarly in the MSCI Taiwan Index (+0.4%), the Materials sector (-4.6%) suffered the steepest decline for the period. Sectors that performed well included Consumer Staples (+5.3%) and Financials (+4.3%).
The ASEAN (Association of Southeast Asian Nations) markets outperformed the region, with the exception of Singapore, which ended the month flat. Indonesia was the top performing market in Asia with Healthcare (+19.3%) and Financials (+15.1%) on the leader board. The Philippines ended 8.6% higher for the period. In Thailand (+2.2%), Industrials (+12.1%), Utilities (+9.1%) and Financials (+5.5%) recorded the biggest gains, while Consumer Discretionary (-7%) saw the largest pullback. Malaysia edged 1.4% higher with Materials (+7.0%) the best performer.
Market Outlook and Strategy
Global equity markets continue to move higher, seemingly ignoring negative economic news such as the adverse effect of the U.S. budget sequester and a faltering recovery in Europe. Central Banks are maintaining their very accommodative monetary policy settings, a situation that continues to drive investors towards risk assets. The BOJ is now joining the fray, while the Bank of England’s new governor-designate is also suggesting that more stimulus measures are needed. Nevertheless, most Asian economies do not need such dovish policy settings, yet there is little that the authorities can do in the face of such inappropriately loose policy. The exceptions are instances where policymakers are trying to moderate property price increases for social cohesion purposes.
From a regional perspective, this powerful liquidity stimulus, generally buoyant economic conditions and higher corporate profits should enable most of the Asian Pacific markets to move higher over the course of 2013.
We will keep an underweight position in Taiwan. Technology stocks make up 55% of the benchmark and we are concerned that many of them are in the wrong product categories and have concentrated risk exposure. In this industry, we tend to prefer Korean technology companies.
We will keep an underweight position in China. The economic recovery is on track and liquidity is buoyant. However, we are concerned that the total amount of credit creation is at a level that may elicit a response from the authorities. Ongoing corporate governance issues are also a cause for concern.
Our key overweight positions remain Thailand and the Philippines. These markets are in fully fledged bull phases. We are obviously looking for signs of excess, which could indicate a topping formation, but to date the moves appear orderly. As such, we will maintain overweight positions in these markets.
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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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