Matthews Asia Country Updates

For the month ending May 2018

China/Hong Kong

In May, the MSCI China Index returned 1.81% and Hong Kong's Hang Seng Index returned -0.44%, both in local currency terms. China's domestic CSI300, the A share index, returned 1.46% in local currency terms (0.31% in U.S. dollar terms). The renminbi (RMB) ended the month at 6.41 against the U.S. dollar.

Chinese equities were mixed in May with the MSCI China stocks outperforming local A-shares. Unresolved trade issues pressured shares and contributed to increased volatility. Anecdotal news flow implies that both the U.S. and China are open to a reasonable resolution to the trade dispute—although investors seem keen to wait for the final outcome as few participants expect a smooth resolution. On a positive note, the long awaited inclusion of China A-shares into the MSCI China Index begins on June 1, 2018. Initially, 233 A-share companies will be added to the MSCI China Index, representing approximately 2.4% of the index weight and less than 0.8% of the MSCI Emerging Markets Equity Index. These weights could step up meaningfully over time as the initial inclusion represents only 5% of the total anticipated addition. The new A-share universe provides broader access to consumption-related stocks, banks, industrials and information technology.


In May, the S&P Bombay Stock Exchange 100 Index returned -1.96% in U.S. dollar terms (-0.82% in local currency terms).

Indian stocks were weak in May and have lagged behind global emerging markets in 2018. A more sanguine environment for corporate earnings was offset by macro concerns. More recently, investors have become concerned with India's dependence on oil as energy prices have risen through budgeted levels. India's current account has suffered and the Indian rupee has weakened. Politics remain an outside risk as the ruling coalition is slowly losing seats in the general assembly and President Modi is up for re-election in 2019. Corporate earnings seem to indicate a generally improving economy. In fact, the latest GDP growth release by the government pointed to the Indian economy growing at 7.7% in Q1 2018—the highest level in seven quarters. Another positive is that recent market weakness has driven valuations of Indian equities more toward their long term averages, which should support prices as the macro environment stabilizes.


In May, the Tokyo Stock Price Index returned -1.67% in local currency terms (-1.36% in U.S. dollar terms). The yen ended the month at 108.74 against the U.S. dollar.

Japanese index returns were slightly negative in May. Japanese equities were plagued by several concerns including global trade tensions and continued political noise related to Prime Minister Abe (and his cabinet's deteriorating approval rating). In addition, consensus earnings growth seems to have softened a bit as strong fiscal year 2018 earnings growth has become a formidable high-bar to surpass. As a result, foreigners have been net sellers of Japanese equities in 2018. However, going forward, we expect that the marginal demand for shares to come from continued corporate buybacks, relatively attractive valuations and the Bank of Japan's (BOJ) purchases of ETFs. In addition, the domestic economy continues to benefit from stronger exports (especially toward China) and a tight labor market supporting reasonable wage growth and domestic consumption.