Asian markets ended higher in July after comments from Federal Reserve Chairman Bernanke appeared to infer that the Fed’s asset purchase program would be extended for a while longer. In China, Premier Li Keqiang stated that China would meet its gross domestic product (GDP) growth target this year, which brought some cheer to the markets. The MSCI AC Asia Pacific Free Index including Japan gained 1.5% while the MSCI AC Asia Pacific ex Japan Free Index closed 2.0% higher during the quarter. (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) ended with a slight decline of 0.19% in July 2013. Economic data from Japan began to suggest a gradual departure from the prolonged deflationary conditions. Nevertheless, global market sentiment still appears somewhat cautious over issues such as the slowing of the Chinese economy and the exit strategy from the U.S. quantitative easing (QE) policy. Meanwhile, the Yen exchange rate moved back to 97.7 Yen/U.S. dollar at the end of the month from 99.2 at the end of June, which placed pressure on the equity market.
Steady expansion of the U.S. economy inevitably increases the possibility of an early start to withdrawal of QE. While the proper timing and pace of the move can have a limited impact on economic fundamentals and equity prices, the assignment of a new Federal Reserve chairman could also influence investors’ policy expectations. Although credit concerns remain an issue, European economic data indicates some resilience in the region’s fundamentals. Meanwhile, the Chinese economy remains the focal point of prospects for the emerging economies.
Economic data in Japan suggested a possible emergence from the deflationary environment. National Consumer Price Index (CPI) was 0.3% year-over-year (yoy) in June, turning positive from the figure of -0.3% (yoy) last month. National Core CPI (CPI excluding fresh food) also entered positive territory, rising by 0.4% (yoy) in June, which exceeded market expectations. Food and energy price increases on the back of a weakened Yen supported the rising CPI, while prices of other items also seem to have stopped declining. Meanwhile, reflecting the uncertainty in global demand, production levels have failed to achieve a linear recovery. Industrial Production Index growth was -3.3%, month-over-month (mom) in June, declining into negative territory for the first time in five months. However, a recovery in production levels is expected, as analysis of recent forecasts indicates 6.5% (mom) and -0.9% (mom) for July and August, respectively. Meanwhile, the domestic economy seems to be moving away from the deflationary environment.
Results of the House of Councilors election could contribute to the development of a more stable political environment in Japan after the ruling Liberal Democratic Party/Komeito coalition secured an overall majority in the upper house. With both houses of the National Diet now under control of the ruling coalition, the passage of key legislation could be much smoother. The rapid turnover of prime ministers over the past six years has hampered effective policy making activity in Japan.
The MSCI China Index (+4.0%) outperformed the region, helped by Chinese Premier Li Keqiang’s comments that GDP growth will not be lower than the initial 7.5% growth target. Information Technology (+13.6%), Energy (+6.0%), Healthcare (+5.4%) and Consumer Discretionary (+4.8%) sectors led the outperformance. Consumer Staples (-0.6%) was the worst performing sector during the period. The MSCI Hong Kong Index also outperformed the region, driven by Consumer Discretionary (+5.6%) and Financials (+4.5%).
Gains in the MSCI Australia Index (+2.8%) came mostly from Materials (+6.5%). Utilities (-1.6%) and Consumer Staples (-1.0%) underperformed. The MSCI India Index’s (-2.8%) lackluster performance was caused by Financials (-14.3%) as the Reserve Bank of India came out with liquidity tightening measures. Industrials (-13.4%) and Materials (-9.3%) also underperformed. On the other hand, Information Technology (+17.0%) was the top performing sector on the back of strong revenue growth, and the sector may also benefit from a weakening Rupee.
The MSCI Korea Index (+3.7%) outperformed the region, with Healthcare (+43.5%) emerging as the strongest sector this month. All sectors recorded positive gains except Information Technology (-2.8%). Leading performers in the MSCI Taiwan Index (+0.8%) included the Consumer Staples (+7.7%), Financials (+4.9%) and Consumer Discretionary (+4.9%) sectors, while Healthcare (-7.8%), Telecommunication Services (-6.4%) and Information Technology (-3.8%) underperformed.
In the ASEAN (Association of Southeast Asian Nations) region, Indonesia (-6.8%) was the worst performing market. Energy (largely coal, -19.8%), Materials (-15.6%) and Consumer Staples (-12.4%) saw the biggest losses. The Malaysia equity market ended 2.8% lower, with underperformance from the Consumer Discretionary (-4.9%), Financials (-4.3%) and Energy (-4.1%) sectors. Thailand’s (-3.0%) weakness was attributed to Utilities, (-5.4%), Financials (-4.8%) and Consumer Staples (-4.6%). Outperformers in the ASEAN region for the month were Singapore (+3.5%) and the Philippines (+2.5%). In Singapore, stocks with exposure to China outperformed.
Market Outlook and Strategy
After a short hiatus at the start of the summer, bull market conditions have since returned to global equities. Investors have regained confidence that official interest rates will remain close to zero, even as the OECD (Organization for Economic Co-operation and Development) economies slowly recover. This environment is highly conducive to buoyant profit growth and a revaluation of equities both in a historical context and relative to bonds.
Nevertheless, the Asian markets are still trailing behind those of the developed economies. Whilst investors have been concerned about uncertainty in China for a number of months, the ASEAN markets and India are also coming under scrutiny. These economies have been growing strongly for a number of years and are facing some constraints – current account surpluses are narrowing while consumer debt levels have increased. In our assessment, this is a natural consequence of Asia being more advanced along the current business cycle, so these concerns are misplaced (with the exception of India and to a lesser extent Indonesia).
With regard to country allocation, we have become more sanguine towards China. We believe the authorities will balance the ongoing essential reforms with a firm commitment to maintaining a growth rate of at least 7%. This should reassure investors and, given the almost universal pessimism attached to Chinese stocks and their cheap valuations, we believe this market could begin to outperform. We will reduce the underweight exposure towards China. However, sentiment towards the market is still fragile and therefore the re-weighting will be staggered over the next few months.
Given our more positive view of China and the sense that Developed Markets still look more attractive than Emerging Markets, we will also marginally increase the exposure to Australia. The economy is well managed, governance is good and it is one of the few countries that has room to cut official interest rates further. However, there is little doubt that the economy will continue to slow further, whilst the political situation is clouded by an upcoming election. As such, we will remain underweight. Our Singapore weighting will be increased. Again this is a developed market with good governance and reasonably valued stocks.
The Thailand equity market has performed very well for us. Given its outperformance and signs of an economic slowdown, we considered it prudent to slightly reduce the exposure. We also have reduced the overweight position in Indonesia for similar reasons.
In the technology driven markets, we have been progressively reducing the position in Korea. Unfortunately, the list of negatives continues to grow. In contrast, the Taiwan position will be increased. Several technology companies have fallen sharply and we view this as an opportunity to increase the position.
Finally, we are cutting our weighting in India. The Reserve Bank of India is attempting to defend the currency by hiking interest rates, yet policy paralysis in the coalition government is stalling the passage of much needed reforms. The market is surprisingly close to an all-time high, yet only a small number of stocks are participating.
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. There is a risk of loss.
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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