MARKET OUTLOOK
Monthly market outlook for China and Asia region.
2018-8
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China

Macro data showed continuous weakness in China’s economy. 3Q GDP growth came down to 6.5%, weaker than market consensus.   October Manufacturing PMI slipped further from 50.8 to 50.2, while Non-Manufacturing PMI also softened from 54.9 to 53.9, both lower than market consensus.  Fixed Asset Investment (ex-rural) growth inched up to 5.4%, but still the lowest level since year 2001.  Industrial Production growth drifted down persistently to 5.8% in September, the first time below 6% since December 2015.  Industrial profit growth in September fell sharply from 9.2% to 4.1%, 5-straight months of decline since April.  While September Retail Sales growth bounced back moderately from 9.0% to 9.2%, general sentiment remained weak.  Exports growth stayed resilient at 14.5%, 4.7% stronger than previous month, due to rush in order prior to comprehensive implementation of tariff hike.  While M2 growth stayed relatively flat at 8.3%, CPI inched up to 2.5% from 2.3 in August. 

After the long National holiday, domestic markets opened sharply lower to catch up the tumble of the US and other regional markets. Apart from unsettled Sino-US trade dispute, the hawkish statement from the US vice President signaled a more intensified geopolitical tension between the two nations. Combined with weaker than expected macro data and sharp correction in other global bourses, A-shares plunged and once fell more than 11% during the first half of October.    While sentiment deteriorating significantly, the government released new policies in order to restore investor confidence.  After the Financial Stabilization Committee meeting, senior officials sent out a clear message that the government is concerned about the consecutive decline of A shares and obviously released the attitude of support to stock markets. For instance, the proposal of setting up specific funds (by brokers, insurance money and funding from local government) to help alleviate potential risks from “Stock-Pledge Lending” eased concern of forced-selling on most small-to-mid cap companies. Also, the Ministry of Finance and the State Administration of Taxation issued the Interim Measures for Additional Individual Income Tax Deductions (draft for circulation), which aimed to boost consumer confidence. 

Although sentiment marginally improved and the broad indices managed to climb up in later part of the month, only a handful of sectors rebounded while most of the stocks declined across the broad throughout the entire month.   A key negative development was lower than expected 3Q results released by not only small-cap companies, but also from many bellwethers in various sectors.  One of the phenomenon that we noticed from recent plunge is that most of the so-called good fundamental stocks suffered even more decline compared to broad indices.  In addition to weaker than expected 3Q results in certain cases, we believe that this could be due to unloading of positions from some institutional investors (as these investors supposed to hold on heavy position across those good fundamental names).  The actions of these selling pressure could magnify the extent of market reaction and making the share price movement irrational in the short term.  For example, the lower than expected 3Q results from Maotai triggered a panic sell-off across all liquor names, making the consumer staples the worst performing sector in October.  Similarly, the disappointing results from Midea initiated decline across all home appliance names.  Over the month, sector performance was diverged.  Financial sector out-performed sharply as supported by Banks (in-line 3Q results and very low valuation) and Brokers (new policy to alleviate risks from “Stock-Pledge Lending”).  Despite sharp correction in most oil names, Energy sector marginally out-performed due to strengths in several coal stocks.  Industrial sector also performed slightly better than broad markets as supported by relatively out-performance in several machinery and construction counters. Other than Consumer plays, Healthcare and I. T. stocks under-performed.  On top of weak 3Q results, concern of further price cut on drugs dampened sentiment.  Although I.T. stocks indeed reported mixed results, the sector was weighted down by Apple-chain stocks and chip makers on uncertain outlook for the trade dispute. Hang Seng Index and HSCEI Index dropped with global markets.  Despite strengths in several telecom and utility plays, sharp decline in Tencent and a few financial stocks pulled down the entire markets. Overall, the BM Index closed 10.9% down from last month. 

Judged from latest comment after the Financial Stabilization Committee meeting, although de-leveraging is still the long-term target, the announcement revealed that “appropriate” de-leveraging is the priority in the near term. In other words, liquidity would be less tight and would be loosened should there be requirements. Nevertheless, we do not expect any meaningful turnaround in the downward trend near term.  Firstly, even with more loosening towards specific infrastructure projects, the impact can only be felt a few months later.  Also, despite more tax deduction, the actual tax saving will not be realized until next year and hence, the willingness of consumption should continue to weaken with slowdown in the economy. 

We believe that the release of latest policies could provide short-term boost to the stock markets. However, due to slowdown of economy and still uncertain about external environment, the outlook remains blur.  In addition, given the upward momentum of the US market also starts to fade, we believe that A-share markets may trend down further near term in high market volatility.   We think that local investors will start to pay more attention to other external issues such as the turnaround of the US market and weaknesses in the EU side. Previously, we expect the 15% decline in the first 3 quarters for A shares should have largely discounted the macro slowdown and worsened geopolitical tension, the latest round of weaker than expected 3Q results may send down the market further until some positive catalysts emerge. Although most so-called good fundamental blue-chips suffer big correction in recent weeks, we still hold the view that large-cap stocks should out-perform amid rising risks awareness and after all still better visibility in earnings for blue-chip counters.

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Greater China Region

MSCI China fell along with other global equities markets last month. Apart from trade tensions, other macro uncertainties such as UK Brexit, Italian budget as well as the plunge in US stocks, hiking US treasury yields, etc. contributed to the weakness of equities markets.  IT stocks led the decline.  This followed the US tech stocks sell-off on trade concerns, profit taking before the mid-term elections, etc.  The weak 4Q guidance of some tech companies added to the IT selling pressure.   China’s 100bps RRR did not provide too much support to the market.   We believe markets will keep a close eye on the US mid-term elections and the scheduled meeting between Trump and Xi at the G20 summit in November.   The outcome from the Trump-Xi meeting could have a binary impact on stock markets.  In the meantime, the Chinese government would continue rolling out supportive measures (e.g. personal tax cut, RRR cut, asset management plan to alleviate “share pledges” pressure, etc.) to reduce the negative impact from the trade conflicts.

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ASEAN Countries

ASEAN equities fell into a bear market in October with the cumulative drawdown surpassing 20% from the January 2018 peak. Singapore and Thailand declined the most in October. Singapore bank interest margins disappointed because funding pressures caused deposit rates to rise faster than lending rates. Thai energy stocks declined with oil price after Saudi Arabia committed to raising production to cover the shortfall from sanctions on Iran. ASEAN markets are pricing-in slower growth in 2019 caused by disruption from the US-China trade dispute and tightening liquidity from a strong USD and higher interest rates. ASEAN equities now confronts the binary event of US-China trade talks at the end of November where the outcome determines whether the market rallies into year-end or falls to new year-lows to adjust for a more severe slowdown in 2019.