North Asian markets ended higher during the quarter after comments from Federal Reserve Chairman Bernanke appeared to infer that the Fed’s asset purchase program would be extended for a while longer. On the other hand, India and the ASEAN (Association of Southeast Asian Nations) region underperformed along with weakening currencies and continued fund outflows. In China, Premier Li Keqiang’s statement that China would meet its gross domestic product (GDP) growth target this year, coupled with better-than-expected economic data, brought some relief to the equity markets. The MSCI AC Asia Pacific Free Index including Japan gained 7.0% while the MSCI AC Asia Pacific ex Japan Free Index closed 7.3% 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) gained 5.31% for the third quarter of 2013, aided by a strong rebound of 7.96% in September. While Japanese stocks lacked positive catalysts and weakened somewhat during the first two months of the review quarter, the decision in early September by the International Olympic Committee to hold the 2020 Summer Olympic Games in Tokyo triggered a market upturn. The cyclical recovery in Europe and the Federal Reserve’s decision to extend the current monetary easing measures also supported the global equity market during the review period.
While debt and credit market issues continue to cloud the prospects for some peripheral economies, the latest macroeconomic figures suggest that broader economic conditions across Europe had started to level out. In the meantime, steady expansion of the U.S. economy raised expectations that policy tapering could be imminent. Thus the Federal Reserve Bank’s (FRB) decision not to start the tapering of its quantitative easing policy in September took the market by surprise, although congressional disputes over the debt ceiling have undermined market sentiment. Meanwhile, extension of the U.S. monetary easing policy also gave some relief to the emerging countries suffering from capital outflows, while Chinese economic data has indicated a more stable picture and has helped to raise expectations. As for the Yen/U.S. dollar exchange rate, this appeared to stabilize, as the FRB’s policy decision will keep interest rate spreads between Japan and the U.S. constant for the time being.
Japan’s macroeconomic data over the past three months has been rather mixed. Corporate production activity failed to show a clear recovery as Industrial production figures were -3.3%, +3.2%, and -0.7% month-over-month (mom), in June, July, and August, respectively, while analysis of forecasts indicates positive figures for September and October. On the other hand, deflationary conditions in the Japanese economy are being resolved steadily it seems. Consumer Price Index (CPI) turned positive from June’s +0.3% and continued to rise to the August figure of +0.9% year-over-year (yoy). Meanwhile, the unemployment rate in August increased to 4.1% from 3.9% in June. However, this may not imply that domestic demand has weakened, since the Active Job
Opening ratio has improved from June’s 0.92 to 0.95 in August.
During the review period, the Capital Goods sector outperformed as China’s economic prospects improved, which lifted expectations of an increase in orders for Japanese machinery companies. A recovery in domestic capital expenditure is likely ahead of the 2020 Olympics, while the number of large construction projects also supported the positive sentiment toward demand in the sector. The Commodities sector also outperformed after having lagged behind the market substantially amid weaker demand prospects for natural resources, especially from China. An improvement in the outlook supported the recovery hopes and enhanced the sector’s relative performance.
The MSCI China Index’s (+12.2%) outperformance was led by the Information Technology (+31.3%) and Consumer Discretionary (+18.1%) sectors. Healthcare was the worst performing sector during the quarter and fell by 0.2% due to the current anti-bribery campaign, which is causing weak drug consumption and sales in China. In the MSCI Hong Kong Index (+8.9%), gains were led by the Consumer Discretionary (+23.9%) sector. All casino gaming names posted double-digit gains on record gaming revenue in Macau.
Indian markets bounced strongly in September as the new Reserve Bank of India (RBI) Governor surprised the markets by announcing concrete measures on his first day in office. During the quarter, the MSCI India Index fell by 5.3%, largely due to the weakening Indian Rupee. Industrials (-20.4%) and Financials (-18.0%) were the weakest sectors while Information Technology (+19.1%) was the strongest since it is a major beneficiary of a depreciating Indian Rupee. The MSCI Australia Index’s (+11.9%) outperformance was led by Materials (+16.1%), Energy (+15.1%) and Consumer Discretionary (+14.2%).
The MSCI Korea Index (+14.9%) was the best performer in Asia with Materials (+24.0%), Industrials (+23.9%) and Utilities (+20.1%) leading the gains. Telecommunication Services (6.3%) lagged behind the broader market during the period. In the MSCI Taiwan Index (+3.1%), Information Technology (-2.2%) and Telecommunication Services (-7.3%) curbed the market’s performance.
ASEAN regional markets bore the brunt of outflows during the period. The worst performer was Indonesia, which fell 24.0% (Indonesian Rupiah fell 14.3% against the U.S. dollar), led by Materials, which fell by 35.7%, while Energy (-18.3%) was the best performing sector. Thailand fell 5.2% during the period with Healthcare (-20.7%), Utilities (-9.8%) and Consumer Staples (-9.6%) lagging behind the broader market. Malaysia’s (-3.0%) underperformance was mainly due to the weakness in Financials (-7.8%), while the best performers were defensive sectors such as Healthcare (+1.8%) and Utilities (+2.2%). Singapore (+4.6%) outperformed the ASEAN region during the quarter.
Market Outlook and Strategy
After several years of strong growth in Asia without much of a hiatus or interim correction, it seems reasonable to conclude that some of the Emerging Asia economies might have already seen the best of their growth phase. Therefore, some sort of consolidation – in both the private and public sectors – could be warranted in the medium term. Although financial conditions in the private corporate sectors are generally healthy, both the public and consumer sectors have become increasingly and substantially leveraged over the past decade; a trend that has accelerated since the Global Financial Crisis in 2008. It is therefore inconceivable to expect the pace of economic growth hitherto to continue indefinitely, backed by ever-higher leverage, without eventually causing harm to the economy.
Fortunately, the U.S. Federal Reserve’s decision to defer the phased withdrawal of its quantitative easing policy in September has offered some relief to these emerging countries. These countries have also instituted some changes themselves, such as higher interest rates, tighter financing, reduced subsidies and currency swap agreements with their own nationals and foreign countries to put themselves on a stronger footing, both in fiscal and monetary terms. These measures so far have helped to address investors’ concerns somewhat; and as a result, we have noticed much more stable regional currencies and equity markets in September.
The corollary of this renewed stability may be slower economic growth rates going forward, with weaker consumer and government consumption likely to persist until inflation or current account deficits are brought lower. For some economies, structural changes are also necessary for them to regain competitiveness. Meanwhile, investors are unsettled by the political impasse in the U.S. over President Obama’s Affordable Care Act and the debt ceiling, resulting in the partial shutdown of the U.S. Government. Although this clearly adds to the list of uncertainties, we believe that any weakness in the markets would represent a buying opportunity. This is a political, binary, event-driven issue rather than an economic issue. We do not believe this shutdown will last for very long or expect it to cause significant damage to the economic growth trend. Moreover, amid such political uncertainty, it may be unlikely that the Federal Reserve will even consider any policy tapering just yet. In fact, the monetary authorities may likely try to offset the negative impact from this budget fallout. Hence, market liquidity could remain ample and we may even expect some reversal of liquidity flows back towards the Emerging Markets.
In terms of country allocation, we remain cautious about Indonesia. No doubt, the government and central bank have initiated some policies to appease investors by tightening liquidity to fight inflation, and they have also made some attempts to stabilize their respective currencies, but these measures are only likely to undermine domestic demand. Meanwhile, we will keep the overweight positions in Thailand and the Philippines, due to their relative strength in terms of macroeconomic stability.
In the North Asia region, we have eased the underweight China exposure. China is still undergoing structural reform and the economy is not likely to enter a new cyclical upturn phase. For the next two months, however, the authorities will focus on ensuring a stable and benign domestic environment ahead of the Third Plenary Meeting in November. We also decided to ease the underweight exposure to Korea. Although the market lacks any specific catalysts right now, there is no stress and no sign of a bubble in the domestic economy weighing on either the currency or interest rates. Demand-supply conditions are improving and the government is keen to jump-start the economy. Downward earnings revisions now seem to be almost behind us, and valuations in the Korean market appear cheap generally.
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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