After a positive start, many Pacific Basin Markets ended the month lower amid concerns that the Federal Reserve (Fed) will soon begin to gradually scale back its quantitative easing measures by reducing the pace of central bank asset purchases. The MSCI AC Asia Pacific Free Index including Japan decreased by 4.8% while the MSCI AC Asia Pacific ex Japan Free Index closed 4.3% lower in May. (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) posted its first monthly decline in nine months, closing 2.52% lower in May 2013. While volatility has increased in the Japan equity market as well as the foreign exchange market, fundamentals of the Japanese economy have shown a steady ongoing recovery. Ample liquidity has characterized equity market conditions in recent months, as international fund flows into the Japan equity market have expanded further, rising to a historical high after the Bank of Japan stepped up its monetary easing policy in April. Market sensitivity has increased to the extent that even negligible changes in global economic and market conditions seemed to create ripple effects and cause substantial volatility in Japanese equity prices. This eventually resulted in a major retrenchment on May 23, 2013 that triggered a drop of approximately 7% in the main index. However, this substantial one-day fall seemed to have a limited direct impact on other global equity markets, since these recent shifts may not be a reliable reflection of changes in economic fundamentals.
Macroeconomic data from Japan suggests a gradual recovery. Industrial Production in April expanded by 1.7% month-over-month (mom), driven by rising automobile production. However, analysis of the forecasts points to a drop in production over the next two months, possibly reflecting a conservative attitude among automobile manufacturers after the recent increase. Consumption expenditure in April grew 1.5% year-over-year (yoy) in real terms according to the Household Survey, but it failed to reach the consensus estimate of 3.0%. National Consumer Price Index (CPI) was still negative in April (-0.7%, yoy), although Core CPI (CPI excluding fresh food) in the Tokyo metropolitan area turned positive (+0.1%) in the same month.
Earnings reporting for the fiscal year ending March 2013 reflected a cautious view of business conditions ahead. In general, export-oriented companies expect earnings to bottom out as forecasts incorporate favorable currency rates and a small increase in production levels. Domestic sectors are also cautious about their earnings prospects, despite signs of a solid recovery in consumer spending and increased fiscal spending, due to a rising cost base caused by higher import prices and tighter labor market conditions. They also face the consumption tax hike scheduled for later in the fiscal year.
The MSCI China Index fell 0.88% in May, largely due to the weak HSBC flash Purchasing Managers Index (PMI), which at 49.6 was the first sub-50 reading in seven months. The Utilities sector (-7.5%) was the weakest during the month. There was also speculation that China might cut tariffs as early as the third quarter of this year. Information Technology (+14%) was the best performing sector. In the MSCI Hong Kong Index (-2.6%), Real Estate (-7.9%) stocks declined the most followed by Utilities (-6.3%). Property stocks fell along with concerns that higher interest rates could hurt demand and higher borrowing costs could hurt developers. The Consumer Discretionary (+5.1%) sector outperformed with most gaming stocks recording positive returns.
The MSCI Australia Index (-12.1%) was the worst performing market in the region, with losses exacerbated by the Australian dollar’s 7.7% depreciation against the U.S. dollar during the period. Financials (-16.2%) and Consumer Staples (-16.2%) were the worst hit sectors. Investors unloaded high yielding stocks such as Australian banks, while consumer companies issued earnings outlook downgrades. Indian stocks also fell this month, (-2.95%) after reversing early gains, while the Indian Rupee weakened in May (-5.2%) relative to the U.S. dollar. All sectors closed lower for the month except Information Technology, which outperformed the market. Utilities (-9.0%) and Industrials (-7.8%) led the decline.
The MSCI Korea Index (+0.46%) outperformed the region in May with Telecommunications (+7.1%) and Consumer Discretionary (+3.4%) stocks leading the gains. Within the Consumer Discretionary sector, Automobile stocks recorded positive returns during the review period as the cross rate between the Japanese Yen and the Korean Won stabilized. On the other hand, Utilities declined -18.4%. The MSCI Taiwan Index (-0.1%) ended flat during May, with Industrials (+1.2%) the best performing sector and Energy (-4.1%) the weakest.
Markets in the ASEAN (Association of Southeast Asian Nations) region closed lower with the exception of Malaysia, which gained 3% during the period. On the other hand, Thailand was the weakest ASEAN market and sank 6.7% during the period, led by Utilities (-11.9%), Financials (-9.9%) and Consumer Discretionary (-8.1%). Singapore declined by 5%, largely due to high yielding stocks (Telecommunication Services and Real Estate Investment Trusts) which saw yields rise. In Indonesia (-4.1%), Energy (-18.3%) and Utilities (-12.7%) lagged behind while Consumer Staples (+5.2%) outperformed. Philippine stocks (-3.2%) fell along with declines in the Utilities (-6.9%) and Industrials (-5.9%) sectors, while consumer stocks were among the outperformers.
Market Outlook and Strategy
Recent central bank action, such as the 0.25% cuts in short-term interest rates from both the European Central Bank (ECB) and the Australian Reserve Bank, combined with rate cuts elsewhere, demonstrates that central banks around the world continue to support asset prices by providing ample cheap liquidity. Hence, we uphold our positive view of global risk assets. One of the developing trends recently has been the relative strength of the U.S. economy and the decline in interest rates outside the dollar zone, which should result in a rising U.S. dollar. We expect this trend to continue and may likely contribute to a fall in commodity prices. This could benefit most Asia Pacific countries except Australia, Indonesia and, to a lesser extent Malaysia.
Within this context, we still have an upbeat view of prospects for the Pacific Basin equity markets. In terms of country allocation, we utilized some of the cash position to subscribe for an IPO (Initial Public Offering) in the Philippines and a secondary placement in Thailand. This slightly increased our weightings in both markets. We also continued our policy of reducing the Korea exposure, mainly due to the market’s continued earnings disappointment.
We added to Taiwan mainly due to the availability of good investment opportunities. Large parts of the Taiwanese market, such as the Banks, Steel and Chemical sectors still appear unattractive, but we can find a number of smaller well-managed companies that are reasonably priced and pay good dividends. A number of Taiwanese companies also have close relationships with Japanese manufacturers, and they are benefiting greatly from buying components priced in cheap Yen.
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.
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.
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