Wednesday, 22 February 2017 11:53

Current Market Outlook: Asian Stocks Rally

Written by Christopher Chu

By Christopher Chu, Fund Manager – Asian equities, Union Bancaire Privée (UBP)


Global stocks rallied higher amid expectations that incoming President Trump would push infrastructure spending and cut corporate taxes in the US to drive growth. Optimism lifted the Dow Industrial Average above the 20,000 level before pulling back later amid worries that economic campaign promises may go unfulfilled. Asian equities outperformed global bourses, returning 6.2% over the month.



MSCI China jumped 6.9% amid stability in the currency and supportive economic data. Efforts by the PBOC to discourage RMB speculation strengthened the currency 0.88% against the USD, easing worries over capital flight. Beijing reported 2016 GDP of 6.7% which came out in line with government forecasts. The 6.0% rise in industrial production and 10.4% increase in retail sales for 2016 were key drivers of economic growth.


MSCI India gained 4.3%, as softer inflation and better than expected industrial production provided some relief over concerns that the demonetization reform may have hurt the economy.  The MSCI North Asian markets of Korea and Taiwan returned 3.6% and 2.1% respectively for the reported period. Korea’s 4Q16 GDP of 2.3% was ahead of expectations as domestic demand offset sluggish export numbers. A preliminary reading of Taiwan’s 4Q16 GDP indicates an expansion of 2.58%.

ASEAN stocks rallied over the month as the MSCI South East Index returned 4.4%. MSCI Singapore equities climbed 5.7% amid a lowering of asset quality concerns for listed financial stocks. MSCI Philippines index advanced 5.7% after Manila reported 4Q GDP of 6.6% YoY and 2016 GDP growth of 6.8%. MSCI Malaysia and MSCI Thailand rose 2.0% and 2.4% respectively. MSCI Indonesia gained 0.3%.



Concerns over the global economic outlook took centre stage at the World Economic Forum in Davos, days ahead of the Trump inauguration. China’s Xi Jinping’s visit marked the first time a Chinese head of state had attended the business summit, where the Chinese President spoke on the need for stability for 2017. Following Trump’s inauguration, questions surfaced on the impact of the new administration and what campaign promises would be enacted.


For the first week, it appeared that concerns were fairly muted. The MSCI Asian Ex-Japan Index returned more than 2% during the five days of the new administration.  Though markets were likely pricing in Trump’s decision to withdraw from the TPP, the PBOC’s efforts to control the RMB bode well for Chinese markets as a combination of monetary policy and FX reserves have been successful in preventing a sharp devaluation in the currency. Though the PBOC lowered the RRR (Reserve Requirement Ratio) for banks later in the month, this should be viewed as a seasonal decision as a result of the Lunar New Year Holiday and not a change in policy. 


China’s overall economic data remains encouraging as momentum in domestic indicators continues to improve. The PPI (Producer Price Index) reading of 5.5% in December was better than expectations, reflecting the ongoing supply side reforms. The improvement in PPI should be supportive of corporate cash flows and profitability, while the 2.3% CPI reading remains within the central bank’s target range.


In its annual budget, India's government called for a reduction in the fiscal deficit to 3.2% of GDP in FY18, from a projected 3.5% in FY17. The proposed budget deficit was a fraction lower than market expectations. While some tax buoyancy is expected on higher tax compliance and income declaration, this is likely to be offset by a temporary slowdown in economic activity expected in the Dec-16 and Mar-17 quarters.


Export driven economies of North Asia continued to reflect resilience despite mixed trade numbers. Taiwan’s December exports rose 14.0% against expectations of 10.0%. Given a suite of robust US and European activity indicators recently and North Asia's traditional high-gearing into global growth upswings, a pickup in the global CAPEX cycle should bode positively for these markets. However, rising protectionism would be a clear risks to that outlook.


Resilient domestic demand and government fiscal spending remain key drivers for ASEAN economies in 2017. Improving relations with China bodes positively for the region, as previous concerns over territorial sea disputes have been assuaged in exchange for better economic cooperation. While a stronger dollar tightens external financial costs, ASEAN currencies have moved relatively in-line with each other, reflecting integration of supply chains and trade markets. A pickup in commodity prices alleviates asset quality stress to bank loan books while producing a multiplier effect for the economy.


Markets appear to have priced in a reflation trade in the US, which includes tax reforms and infrastructure spending. But recent controversial Executive Orders could derail some of the new administration's campaign promises. The other risk is the amount of political capital Trump will have left after his first 100 days. Amid low approval ratings and split Republican backing, delays in getting legislation through seem inevitable. However, if peaceful political compromise can be reached, this may add optimism and stimulate greater risk appetite.

Asian markets are expected to encounter headwinds in this opaque environment; however, given the fading correlation with the USD, the correction provides an opportunity for long-term investors who had previously missed out on earlier rallies.  Earnings are recovering, most evidently in the cyclical markets in North Asia, while domestic demand in regional economies of China, India and ASEAN supports stable growth.