Matthews Asia June 2016 Country Updates: China, India, Japan, Korea & Southeast Asia
In June, the MSCI China Index returned 1.11%. Hong Kong’s Hang Seng Index returned 1.43% (1.56% in U.S. dollar terms) and China’s domestic CSI300, the A share index, returned 0.16% (-0.94% in U.S. dollar terms). China’s currency, the renminbi, ended the month at 6.65 against the U.S. dollar. The real effective exchange rate was down 4% year-to-date through the end of May, but was up by 50% from June 2005, when China began to reform its exchange rate mechanism. In the first five months of 2016, new home sales, on a square meter-basis, rose 34.2% year-on-year, after rising 6.9% for the full year of 2015, and compared to zero a year ago. Online retail sales of goods rose 25.9% year-on-year through May. Uncertainty over the impact of Brexit may rattle Chinese investor sentiment in the short term, but the lengthy process of U.K. disentanglement from the E.U. is unlikely to have a significant impact on the Chinese economy. Last year, China accounted for 35% of global economic growth, and if Brexit results in slower growth in the U.K. and anxiety in the developed West and in emerging Europe, the Chinese share of global growth could rise even higher.
Indian markets were volatile in the month of June 2016 due to macro uncertainties such as Britain’s exit from the European Union, and central bank Governor Raghuram Rajan’s announced departure from the helm amid resurging inflation. The S&P Bombay Stock Exchange 100 Index returned 1.22% in U.S. dollar terms (1.85% in local currency terms) driven by gains in the financials, consumer staples, materials, and energy sectors.
The Reserve Bank of India (RBI) continued with its accommodative monetary policy stance by maintaining an interest rate of 6.5% despite an acceleration in inflationary pressures. The consumer price index was reported at 5.76% for the month of May 2016 as compared to 5.4% in the previous month. Food inflation for the month of May 2016 was reported at 7.55%, the highest reading in the last 21 months. Given Rajan’s impending departure, market participants started pricing in the impact of a more accommodative monetary policy as reflected in lower short-term rates and higher long-term rates. The uncertainty, created by news over Rajan’s departure, led the government to announce policy decisions such as, increasing foreign direct investment limits with automatic approvals in some key sectors, and approving recommendations to raise salaries for millions of civil servants.
Despite the delay in the start of the monsoon in June onset, good rainfall levels were expected to reduce the deficit further. New accounting standards set earlier this year in India are expected to bring accounting for corporations closer to those followed globally known as the International Financial Reporting Standards or IFRS. The adoption of such new standards is likely to change operating metrics and return ratios of companies besides providing more disclosure to shareholders.
In June, the Tokyo Stock Price Index decreased -9.61% in local currency terms (-3.05% in U.S. dollar terms). Defensive stocks outperformed with telecommunications, consumer staples and health care the strongest performers while financials, materials and consumer discretionary stocks all underperformed. The yen strengthened by 6.8% versus the U.S. dollar.
Volatility was evident during the latter half of the month following the United Kingdom’s referendum decision to leave the European Union. Immediately following confirmation of the result, the yen strengthened and consequently the stock market sold off as fears increased over the impact on corporate earnings.
In the domestic economy, Prime Minister Shinzo Abe announced the postponement of the scheduled consumption tax hike from April 2017 to October 2019 as consumer spending continued to show weakness, contracting 1.9% in May, despite higher oil prices compared to last year.
Inflation data was also weak with May’s consumer price index, excluding fresh food and energy, rising by only 0.6% versus the medium-term target of 2%. The post-Brexit impact and government concerns have renewed expectations of further monetary easing by the Bank of Japan, while the immediate focus turns to July’s Upper House election, viewed by many as a barometer of support for the current administration’s economic policy.
During the month, the Korea Composite Stock Price Index (KOSPI) returned -0.65% in local currency terms and 2.52% in U.S. dollar terms. The Korean won depreciated 3.5% against the U.S. dollar.
South Korea’s trade surplus rose to US$11.6 billion in June, an all-time high, as imports fell 8.0% year-over-year while exports declined 2.7%. Export volumes declined by 2.8% compared to a year ago. Trade volume weakness, largely driven by deflationary pressure, seems to be bottoming out as gauged by the decelerating pace of decline in exports.
Korea’s central bank unanimously voted to cut its policy rate by 25 basis points (0.25%) to 1.25%. The bank’s policy committee cited macro risks such as the Brexit vote and lackluster trade figures as well as weakening consumption and investment as reasons to cut rates. The members also largely agreed that the delay in rate hikes in the U.S. provides good opportunity to cut rates in Korea. While growing household debt was a concern, members agreed that this is unavoidable given a strong property market. Recent measures by financial regulators to tighten lending also appeared to be welcome by the committee.
In June, the MSCI South East Asia Index returned 4.93% in U.S. dollar terms. Notably, Philippines’ Stock Exchange PSEi index returned 5.44% in local currency terms (4.56% in U.S. dollar terms) and Indonesia’s Jakarta Composite Index rose 4.95% in local currency terms (8.56% in U.S. dollar terms).
Rodrigo Duterte was inaugurated as the 16th President of the Philippines in late June. The new administration earlier released its 10-point economic agenda, highlighting infrastructure, attracting foreign investment and poverty alleviation as some of the key policy goals. The government also intends to increase deficit spending to up to 3.0% of GDP (from 0.9% in 2015) to support economic growth, and infrastructure spending up to 7.0% of GDP.
In Indonesia, in June, the parliament passed into law the Tax Amnesty bill. The bill, which covers undeclared assets held onshore and offshore by Indonesians, is proposed for implementation over a nine-month period from July 2016 to March 2017. The government estimates that it can collect up to 180 trillion rupiah (US$13.66 billion) in tax revenue from the declaration of assets.