MARKET OUTLOOK
Monthly market outlook for China and Asia region.
2018-7
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China

Subsequent to April’s better than expected data, economic activities softened in May partly due to weak local government spending. While property and land sales slightly improved, Industrial Production eased and Fixed Asset Investment fell sharply, from 7.0% and 1.0% to 6.8% and 6.1% respectively. In contrast, the property sector strengthened further; with most indicators, such as land sales, property sales, new housing starts and property investment, improved in May. In particular, the boom in lower tier cities continued.  Manufacturing PMI eased off marginally to 51.5, while Non-manufacturing PMI stayed largely flat at 55.0%.  The adverse impact from Sino-US trade dispute yet to be felt. Exports and imports growth in May were stronger than expected (could be due to rushing order ahead of any trade war).  Domestic consumption, however, surprised the market on the downside where May’s Retail sales growth fell unexpectedly to 8.5%, the lowest growth in 15 years.  One of the key highlight in June was sharp depreciation of CNY/USD. On monthly basis, CNY devalued 3.2% in June, and was down by more than 5% from the peak in February.  While M2 growth came in slightly lower than expected, New Yuan Loan inched down from 1180 billion to 1150 billion. Although PPI picked up moderately from 3.4% to 4.1%, CPI in May remained stable at 1.8%. 

 

Domestic stocks hovered in a trading range during the first half of the month, but then plunged in last two weeks. Besides weak macro data, mounting tension between China and the US on trade disputes scared off investors as more retaliation actions would be implemented by both nations, which could have very bad impact to economic development.  In addition, confusing signals from the US side dampened sentiment and triggered rising uncertainty.   Domestically, worries of lower monetary compensation % for shanty town redevelopment and sharp RMB depreciation drove down all stocks along the property-chain.  Although it was rumoured that the PBOC may lower RRR soon due to poor sentiment, it had little support to the market.

 

All sectors declined over the month, while large-cap stocks performed slightly better than small-cap plays on relative basis. In fact, rising number of small-cap stocks were sold down heavily given their major shareholders pledged their stake, which severe stock price decline triggered concern of forced selling (but lastly brokers were informed not to execute forced selling for these pledged shares).  In fact, no particular sectors showed obvious out-performance as investors rushed to trim down their equity exposure, of which Telecom, I.T. and Industrial stocks were the worst performers over the month.  

 

Looking ahead, economic growth is likely to soften in 2H 2018 due to lower monetization rate for shanty town redevelopment and slowdown in infrastructure spending. Although trade disputes may impose further pressure on growth, given the overall economy remains quite resilient, we do not think that PBOC will loosen liquidity massively any time soon.  Instead, a relatively neutral rather than tighten stance may be adopted.  For consumption, despite weaker than expected retail sales, it may be too early to conclude that this represents a near term turning point.  In fact, consumer confidence remains strong as supported by higher income and property prices.  Hence, retail sales may rebound soon in next few months. 

 

We are cautious about the market in the near term. Several negative factors that drag on the market, such as Sino-US trade dispute, RMB weakness, liquidity tightening and slowdown in macro growth remain intact.  Having said all this, given the key indices dropped by more than 20% from the peak in January this year, and earnings growth remain ok (still expect mid to high teens), we believe that further significant downside is unlikely (unless systematic risk emerges, where we think that the chance is slim).  Although we think that recent pull back is overdone (or at least discounted most of the negative news), and is already driven by sentiment; lack of near term catalysts may capture any meaningful rebound.  All-in-all, near term, A shares will remain under pressure and drifted downward in rising volatility.

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Greater China Region

Greater China stocks fell 1.7% m-o-m in KRW (or 4.4% in USD) in June.  Trade tensions continued to weigh on market sentiment, which was also negatively affected by recent CNY weakness.  Greater China equities fell across the board with negative returns registered for all sectors last month.  Defensive sectors such as telecom, consumer staples, etc.  outperformed.  Looking ahead, it is believed that market attention could still remain on the trade tension and CNY movements.   Key things to watch include i) actual implementation of tariff on 6th Jul, and ii) potential escalation by the US to impose tariffs on additional imports from China, etc.  We believe earnings growth should still be solid in 1H18.  Barring fully-fledged trade war, we see opportunities in 2H18 on solid corporate earnings growth, lowered tail risks thanks to financial deleveraging, positive consumption outlook, and undemanding valuations, etc.  

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ASEAN Countries

Market declines and foreign fund selling accelerated in June Persistent market weakness over the past five months reflect an accumulation of growth fears from tighter financial conditions and US-China trade protectionism. The market drawdown since January is approaching the 20% bear market threshold and leading indicator of economic recession. Yet the economic impact from higher interest rates and trade protectionism is not expected to exceed 1% from the current 8% nominal GDP growth forecast. The stock market should be close to bottoming since the majority of portfolio de-risking and capital outflow has been executed while market valuations are close to historical lows. However, market direction in 2H18 is likely to be range-bound with rebounds capped at 15% as multiple expansion is obstructed by ongoing  concerns over macro growth risks.