Monthly market outlook for China and Asia region.

October’s export growth unexpectedly accelerated as shippers urged to send goods to the US ahead of any planned increase in tariffs that may take effect in January. However, overall economy showed further signs of weakness. After falling to the lowest level over the two years last month, Manufacturing PMI inched down further to 50.0, a juncture of contraction for overall economic activities. Non-Manufacturing PMI also weakened from 53.9 to 53.4, showing that both construction and servicing sectors continued to slowdown. Although FAI growth recovered mildly from 5.4% to 5.7% in October, Retail Sales growth and Industrial Profit growth maintained a declining trend.  In fact, based on early indicators from Bloomberg Economics, it suggested that recent government actions to support household and private companies failed to boost economy and the underlying economy slowed for a sixth straight month in November. 

A share markets had a volatile month, managing to close the month in marginal gain of 0.6% (CSI 300 Index). On one hand, investors held positive expectation for Xi-Trump meetings hoping for constructive progress to alleviate risks from trade tension.  Nevertheless, it was acknowledged that there could be no immediate resolution and longer negotiation and complements were well anticipated.  But Trump’s oscillating comments created rising volatility ahead of the meeting. Overall, investors remained skeptical and committed only for short term trading, resulting into a very mixed markets with sharp divergence in sector performance.  Sectors that under-performed in recent months saw strong trading interests, particular for those dropped to reasonable valuation level.  Consumer Staples, Healthcare and I.T. names gained sharply as investors tended to speculate a near term rebound when most of the bell whether in such paces retreated to its 52-week low level. In addition to weak economy, Energy shares and Material names tumbled due to more than 30% correction in oil price within last two months.  Small-cap stocks rallied in November after Xi jinping emphasized that government will continue to give full fledge of support to private companies.  Also, some TMT and software companies rebounded significantly on hopes of positive development from Xi-Trump meeting.  Overall, small-cap and growth plays out-performed sharply in November, reducing their under-performance to large-cap counterpart’s year-to-date.  In Hong Kong, China-related stocks also had a strong run, seeing a strong rebound for both Hang Seng Index (+6.1%) and HSCEI Index (+4.8%).  In addition to strengths in several financial plays, such as banks and insurance counters, the sharp rebound of Tencent (+16.9% MoM) contributed significantly to the out-performance of the market.  The BM Index (MSCI All China) gained 4.6% MoM.


Given major trading partners of China continued to see deceleration in growth, and there is no immediate threats of rise in tariff in next 90 days, exports growth is likely to soften in coming months. Despite temporary ceasefire of trade disputes between China and the US, we believe that the government will continue its accommodative monetary policy given overall economy remains sluggish.  Apart from support to private companies via banks’ lending, there could be more measures to come to revive the softened consumption. 

The Xi-Trump meeting ended with constructive progress, leaving more rooms for the two nations to discuss further in order to find a way for both to accept. Although it is merely a temporary ceasefire and higher tariff may finally be implemented if no mutual agreement is reached in 90 days, we believe that it will give a breath to the market and a near term relief rebound is expected.  However, we do not expect this is the bottom of a reverse for a secular uptrend.  Putting aside the uncertain of trade dispute after 90 days, declining earnings growth and weakened economy needed further solutions.  As a result, we expect the market will re-enter into a consolidation phase after a near term rebound, while the magnitude of rebound could also be limited.

Greater China Region

MSCI China rebounded last month. Rising optimism on Sino-US trade negotiations helped support the market. At the beginning of the month, US President Trump tweeted that discussions with President Xi moved along nicely with meetings being scheduled at the G-20 summit.   During the month, dovish comments by US Fed Chairman on US interest rates, US mid-term elections, etc. helped boost market sentiment.  3Q results were mixed.   As Presidents Trump and Xi agreed on a temporary truce on trade for a 90-day period, we believe there could be a near-term relief rally.  The constructive progress should help boost market sentiment, but anxiety may be back soon as the 90-day window is not that long.   Trade negotiations in the next 90 days will be key to watch, and the road could remain bumpy toward a full resolution.

ASEAN Countries

ASEAN equities recovered from a year-long downtrend supported by declining interest rate risk from Fed policy signalling and declining inflation risk from lower oil prices. ASEAN bonds and currencies appreciated as visibility on peak Fed policy rates encouraged carry-trades into higher-yielding emerging markets. Indonesia was the best performing market as equity returns were enhanced by currency appreciation from fund flows attracted by the highest real interest rates in Asia. The 2015-20 US rate hike cycle is expected to peak below 3.5% from slowing global growth. ASEAN markets should have already bottomed as currencies stabilize with easing monetary conditions but is likely to stay range-bound in a slow growth, low inflation environment in 2019.