Pacific Basin equity markets continued to rally in April, led by Japan where the central bank announced that it intends to double the monetary base and inject liquidity into the markets. The MSCI AC Asia Pacific Free Index including Japan gained 4.9% while the MSCI AC Asia Pacific ex Japan Free Index closed 2.6% higher in April. (All performance figures are based on MSCI indices in U.S. dollar terms with dividends included unless otherwise stated.)
The Tokyo Stock Price Index (TOPIX) rallied for an eighth consecutive month in April 2013, climbing a further 12.6%. Market participants responded favorably to the new monetary policy launched by the Bank of Japan (BOJ) at the beginning of the month, and we observed massive inflows to the Japan equity market from international investors.
Policy decisions announced at the first BOJ meeting under new Governor Kuroda at the beginning of April took the markets by surprise. The BOJ policy board voted to double the monetary base through increased purchases of long-term government bonds, exchange-traded-funds (ETFs) and Japanese Real Estate Investment Trusts (J-REITS) to meet an inflation target of 2% in two years. These asset purchases exceeded market expectations and the presentation by the new governor was clear and unambiguous in its delivery, which seemed to differentiate Governor Kuroda’s style from that of his predecessors, many of whom were criticized for poor communication with the market.
The Yen continued to weaken relative to other major currencies on the back of this aggressive monetary loosening. The rapid weakening of the Yen over the past seven months appeared to raise concerns in some countries. Nevertheless, the Yen has yet to reach the same level as before the financial crisis in 2008, and exchange rates were not highlighted as an issue during the G20 meeting held on April 18-19.
Macroeconomic figures point to a very gradual recovery. Industrial production in March was 0.2% month-over-month (mom), which failed to meet the consensus estimate of 0.4%. Global demand, especially in China and the European Union, has not shown any clear signs of bottoming out yet. Nevertheless, domestic consumption is showing signs of a recovery. Consumption expenditure for March was 5.2% year-over-year (yoy) higher in real terms from the Household Survey and beat the consensus estimate of 1.6%. However, the Consumer Price Index was -0.9% (yoy) in March, unchanged from the month before.
A surge in trading volume supported the major securities brokers, while real estate related companies received another boost from the new monetary policy shift. Therefore, the Financials sector and the Infrastructure sector, which includes the real estate sub-sector, led the market rally during April. Meanwhile, the Commodities sector lagged behind the market amid weaker global demand and lower basic material prices.
The MSCI China Index (+1.1%) underperformed the region slightly as gross domestic product (GDP) growth recorded in the first quarter of 2013 (1Q13) was weaker than expected. Energy (-5.1%) and Materials (-4.7%) were the weakest performers during the period. In the MSCI Hong Kong Index (+2.6%), Telecommunication Services (+7.1%) was the best performing sector.
The MSCI India Index rebounded this month, gaining 4.2% as the weak oil price spurred buying activity. Other positives factors driving the market include a narrowing of the trade deficit in 1Q13 and softer inflation numbers. Telecommunication Services (+19.3%) and Consumer Staples (+13.7%) were the best performing segments. The MSCI Australia Index (+4.7%) outperformed the region largely due to good performances from high yielding sectors. Telecommunications (+9.9%) and Financials (+8.2%) led the gains. On the other hand, the Materials (-2.9%) and Energy (-1.2%) sectors lagged behind due to the weak Chinese GDP numbers and the falling gold price.
The MSCI Korea Index (-2.4%) was the weakest regional market during April, largely due to subdued corporate earnings and the depreciating Yen which hurt exporters. Construction stocks were also weak as overseas projects saw operating losses due to intensifying competition and costs overruns. Defensive sectors which include Telecommunications (+14.8%) and Utilities (+4.6%) outperformed. In the MSCI Taiwan Index (+4.0%), all sectors recorded positive returns except for Financials (-0.3%).
The ASEAN (Association of Southeast Asian Nations) region closed higher. Malaysia (+4.7%) was the strongest country, followed by Singapore (+3.4%), Thailand (+3.2%), the Philippines (+2.5%) and Indonesia (+2.0%).
Market Outlook and Strategy
With central banks continuing to provide ample cheap liquidity to the global capital markets, we maintain our positive outlook for the Pacific Basin region. Meanwhile, economic fundamentals in the region are generally sound and stock valuations are reasonable, especially in relation to bond markets.
Some commentators have been warning of a market pullback based on the “sell in May and go away” adage, a strategy that has worked well in the last three years. In each case, economic growth temporarily weakened and caused investors to reduce their equity positions. In our view, this year could be different, as investors have already reduced their Asian exposure due to weakness in the Chinese economy while Japan appears to be in the early stages of a bull market.
In terms of country allocation, we will reduce exposures to both China and Korea. In the former, we are a little concerned about the slowdown in economic activity, further policies to contain house price inflation, and the potential adverse impact of reforming wealth management products and local government financing vehicles. These issues compound our long held views on corporate governance challenges and the lack of interest from local Chinese investors in their own market.
In Korea, we see a long list of negative influences such as North Korea, the lack of dividends in a yield-chasing market, rejuvenated competition from Japan, demographic challenges from a low birth rate, very high consumer debt levels, and a government dedicated to rebalancing the economy away from big business. There are also some positives such as cheap valuations and world-class businesses. However, we feel it is time to further reduce the exposure.
On the other hand, exposure to Australia was raised, although it remains underweight. While we have some concerns about the level of the Australian dollar and believe commodity prices may face further downward pressure, the non-resource stocks look attractive. Companies are generally well managed and many pay high dividends. Ongoing support from the domestic pension fund industry is also positive.
Our largest overweight positions remain the smaller ASEAN markets, such as Thailand, the Philippines and Indonesia. This strategy has been successful, and we are always looking for signs of excess that could necessitate profit taking. However, the rise has been orderly and justified by improved fundamentals.
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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