Monthly market outlook for China and Asia region.

While Fixed Asset Investment growth and Industrial Production growth in December stayed unchanged at 7.2% and 6.6% respectively, Retail Sales growth softened marginally from 10.3% to 10.2%. PMI data in January was mixed.  While Manufacturing PMI softened from 51.6 to 51.3, due mainly to weakened production and new orders, non-manufacturing PMI inched up by 0.3 to 55.3. 4Q GDP growth remained the same as 3Q at 6.8%, marginally better than expected.  Overall, it seemed that the economy remained steady and seasonal effect (different timing of Chinese New Year) might have distorted the actual stance, which means that we may see slightly better data in February.   


A-share markets were much stronger than expected. Although it was expected that domestic stocks might perform well amid better than expected earnings in some sectors (e.g. property and some upstream spaces), the strong run-up in January caught most of the investors.  As a result, some lagging money chased up the market and rushed into a few large-cap sectors, such as banks, property and cyclical plays.  Apart from slightly better than expected macro data, persistent strengths in overseas markets paved the way for the rise of A shares.  Confidence in strong earnings from property space accumulated, which pushed up property names throughout the month.  In addition, investors tended to participate in a safer way, which ended up concentrating on a few large-cap banks. While oil stocks and coal names surged on rallies of oil and coal prices, other non-ferrous and basic metal stocks just gained moderately.  I.T. stocks continued their under-performance due to weaker than expected Apple iPhone sales data.  Small-cap stocks drifted down further after rising number of announcement for lower than expected earnings.   


Although strong CNY might exert pressure to exports, we expect to see stronger trade data given there are more working days this January and potential front-loaded shipments ahead of the New Year holiday. While inflation is likely to pick up ahead of the Chinese New Year due to rising food prices, we are likely to see a surge in new loans in the near term amid renewal of annual quota for lending from banks, despite overall tightening stance should be maintained for the rest of the year. Although sentiment generally improved due to sharp rally of the market, we become more cautious on overall performance in February. Apart from lower than expected earnings from most small-cap counters that adversely affect sentiment, valuation of most out-performed sectors/ stocks become less attractive, especially after the recent rally. Near term, there might be further inflow into the large-cap stocks due to risk adverse from small-cap and growth plays, quite fairly valued blue-chip names make further upside become limited. In addition, investors may hold up their activities ahead of Chinese Lunar New Year, which will dry up liquidity to the market. Volatility will remain high as profit taking activities will continue to encounter new money inflow from new launched fund products.

Greater China Region

Off-shore China stocks rose by about 9.6% m-o-m in KRW (or up 9.9% m-o-m in USD) in January, led by off-shore China stocks. Banks, properties, energy, materials, etc. rose due to re-rating on fundamentals improvement, robust sales and earnings growth expectations, rising oil/coal prices, positive profit alert, etc.  The weak USD boded well for emerging market equities.   Hong Kong lagged within the Greater China universe as the defensive financials and utilities underperformed during the market bull run.   We believe Greater China equities would continue to trend upward in 1Q on upward earnings revisions, positive profit alerts, mid-cycle valuations, reduced domestic macro risks, continued fund inflows, etc.  We do not rule out a bumpy-ride near-term due to profit taking given strong share price performance last year and YTD.    However, any near-term market weakness should be a good opportunity to accumulate for multi-year upward re-rating potentials.

ASEAN Countries

ASEAN equity advanced to pre-QE tapering highs of mid-2013.   Market re-rating from stabilizing capital and commodities markets in 2017 followed-through to re-rating on faster growth prospects in 2018. Market breadth accompanied market gains as most countries and sectors advanced. Oil and coal stocks performed the strongest from earnings upgrades on higher oil and coal price forecasts. Improving global macro provides a favourable environment for active stock picking and alpha generation not seen since 2012. ASEAN markets are targeted to return 20% in 2018 with periodic corrections of less than 10% expected provided positive fundamentals sustain: Goldilocks economy of growth and stable inflation and positive earnings revisions.