A Brief on Global & Local Markets, Investment Strategy.
Week in Review | 30 July – 3 August 2018
Central Bank Roundup
The US Federal Reserve kept interest rates unchanged at its policy meeting, but looks on track to hike rates in September. That would be the third rate hike for the year, where it also guided for a fourth hike in December dependent on growth and inflation data. The strong economic picture was reinforced by strong job numbers on Friday, with the unemployment rate trailing at 3.9% below the Fed’s target of 4.0%
Meanwhile, the Bank of Japan (BoJ) kept rates steady while announcing a range of policy changes, including adding forward guidance and allowing a wider bond-yield range. The BOJ decided to maintain its short-term interest rate target at -0.1% and pledge to guide 10-year government bond yields around 0%. BoJ governor Haruhiko Kuroda indicate that the central bank was now willing to tolerate more volatility in the 10-year yield by 20bps. Persistently flattish and low yields have hurt banks profitability in the past and the BoJ would now like to see the long-term yield curve steepen to alleviate pressure of banks.
Asia Rocked By Trade Jitters
Asian markets remained volatile last week as trade tensions were elevated following announcement of China’s latest tariff threat against the US. North Asia markets reacted negatively to the news with the Hong Kong Hang Seng index falling 3.9% and the Shanghai Shenzen CSI 300 index plunging 5.8%. The broader MSCI Asia ex-Japan index closed down 2.5%
China upped the ante on its trade war with the US by preparing levies, ranging from 5% – 25% on $60 billion worth of U.S. imports, including many agriculture-related goods. China said the latest duties would be implemented if the U.S. proceeded to impose more tariffs on Chinese goods. Earlier this month, U.S. President Donald Trump had proposed tariffs of up to $200 billion worth of Chinese goods to be increased to 25% from an initially announced 10% rate.
On the currency front, the Chinese yuan saw some support last Friday after the People’s Bank of China (PBoC) stepped-in to arrest the decline of the currency by imposing a reserve requirement of 20% on trading of foreign-exchange forward contracts. This will effectively make it more expensive to short the yuan which extended gains following the announcement end of last week.
Earnings season continue to roll-in with divergence seen between the US and Asia that have reported mixed results. Boosted by tax cuts, the US average earnings growth topped 27% y-o-y as savings from a slash in the corporate tax rate from 35% to 21% fuelled the profit surge of US firms. The average earnings beat was 7% across sectors.
On the flipside, results season in Asia was more muted with earnings disappointment of up to 10%. Industrials and telco were the biggest losers missing earnings estimate by up to 40%. Though more information would need to be gleaned from individual stocks and if performance of the overall sector was disproportionately skewed.
After 12-13 weeks of consecutive outflows, global emerging market (EM) fund flow turned slightly positive last week buoyed by inflows into bonds and ETFs. On a tactical standpoint, markets seem primed for a bounce, but trade concerns may continue to exacerbate volatility and put a drag on performance of EMs.
Nonetheless, stimulus measures unveiled by China to help cushion the impact from its deleveraging exercise may provide additional support and liquidity to markets. Described by regulators more as policy fine-tuning, these measures do not change Beijing’s overall policy direction to curb shadow-banking and rein-in credit bubbles. Instead such policy tweaks would help soften the blow from a deleveraging drive that was too quick and intense given recent softness in Chinese data, without also resorting to easing measures to flood its economy.
On portfolio-positioning, we have increased our equity exposure with cash-levels across our Asian portfolios ranging between 20% – 30%. We recently added cement, property, banks and insurance names into our portfolio. For tech exposure, we are looking for levels to average-in for positions into Tencent, where its share price has corrected sharply in the past 2 months. Its quarterly results are slated to be announced in mid-August and could see some pressure from squeezed margins. Valuations look attractive where it is trading at 2-year forward P/E of 21x, which is reasonable for a high-growth company.
Opportunities in ASEAN
Indonesia – Having endured an uninspiring outing throughout 1H2018, the market has finally hinted on some signs of recovery as it recouped USD70 million worth of inflows last week. While the amount hardly puts a dent on the USD3.3 billion outflow seen from the equity segment alone YTD, indicators are suggesting that a turnaround is en route – not in a big way, but a positive start nonetheless.
Indonesian banks, in particular, are seeing an improved outlook on lower credit costs and better loan growth. Bank loans grew at a double-digit pace (in the low teens) for 2Q2018 as compared to the single-digit growth reported in the previous quarter. Consumption has also remained fairly stable, buoyed the government’s implementation of subsidies to keep inflation levels at bay.
Valuations, on the other hand, have eased down to more palatable levels – in which the MSCI Indonesia Index is currently trading at 14.4x vs. the 17.0x levels seen in early 2018. Thus, from a risk-reward perspective, the Indonesian market is looking a tad bit more attractive now. We express our optimism through its improving banking sector – such as Bank Mandiri, which is one of the nation’s largest banks in terms of assets, loans and deposits.
Thailand – While the Thai Baht has weakened over 2Q2018 amidst the broader EM weakness, we are witnessing an improvement in the operating capacity of businesses / industries; in which utilisation rates have rose to 70.0% from the 60.0% levels seen earlier this year.
Private consumption and investments within Thailand continues to be a boon to the local market; whilst its tourism play – albeit suffering from a dip in tourist arrivals for July – has remained largely resilient for the most part of 2018. In light of rising tensions on the global trade front, we remain sanguine in Thailand’s retail and tourism sector that appears to be more domestically-driven; such as the likes of CP All which operates a convenience store business across Thailand, as well as Airports of Thailand amongst others.
Philippines – The Philippines Composite Index staged a surprisingly strong rebound last week as investors’ confidence improved amid Bangko Sentral ng Pilipinas’ (“BSP”) recent tightening stance and commitment to stability. Currently, the government is still aiming for a strong economic expansion this year of between 7.0% and 8.0% – on the back of a boost in infrastructure projects.
Nonetheless, rising inflation – with June’s CPI reaching an all-time high of 5.1% that is running above BSP’s 4.0% upper limit – could pile up further pressure onto businesses by driving employment and operating costs higher. Hence we are approaching the Phillippines market with more caution and shall stay underweight for the time being.
Updates on Malaysia
Domestically, the local market stayed jittery as trade tensions simmered between the US and China, with the benchmark KLCI barely unchanged at 0.6%. Foreign outflows have begun to recede, turning positive last week as global funds accumulated RM348.9 million net of local stocks according to MIDF Research.
Market concerns over potential succession issues in Khazanah were swiftly addressed last Friday following the appointment of Datuk Shahril Ridza Ridzuan as its Managing Director. Datuk Shahril replaces Tan Sri Azman Mokhtar, after the entire Khazanah board resigned en-masse with 8 other directors.
Last week also saw the Federal Government making an offer to buy-out SPLASH’s water treatment assets at RM2.55 billion from Gamuda and Kumpulan Perangsang Selangor (KPS). Gamuda Bhd owns a 40% stake in SPLASH, whilst Kumpulan Perangsang Selangor (KPS) holds 30%. At RM2.55 billion, the offer price is below book-value and both companies would have to post significant losses on disposal of its water-assets. Share price of Gamuda and KPS gave up gains of between 5% – 6% when markets reopened on Monday, despite improved sentiment in construction sector.
There may be wider implications to the water-related sector with the Federal Government now owning all the water assets in Selangor and if they would have the political will to increase water tariffs. Such a move would send a strong signal of the state’s intention to incur capex on its pipe replacement programmes and help solve a long political deadlock that has caused severe water shortages in Selangor and help replenish its water reserve margins. Over 35% of water produced goes to waste due to poor piping and capacity issues.
Despite catalyst seen in the sector, actionable stock-ideas may actually be limited as water stocks are typically small-caps with diversified business segments with piping contributing only a minor part of its entire business operations.
Fixed income updates & positioning
The Asian bond space saw a relatively softer outing last week, as ripples from the increasingly tense trade spat between US and China slowed bond purchases in the region; as investors were driven to seek refuge within US treasuries.
In addition, profit taking activities were also evident amongst regional fund managers following the strong recovery seen in the prior two weeks – in which China HY property and industrial names has rallied strongly; driven by PBoC’s recent announcement to ease lending measures and boost investments into lower-rated corporate debts. Nonetheless, as a lot of these corporates will look to refinance their debt, supplies/ issuances will likely pick up in the coming months which should subsequently put a cap on regional bond prices.
Portfolio action wise, we are still holding a cautious view as duration is kept short across our Asian funds; with an emphasis on IG names. In view that yields are expected to correct/ rise further, we are refraining from redeploying into markets too heavily at this point and shall await for better entry.
On the domestic front, the MGS market also saw some profit taking activity last week following the MYR’s recent strength against the USD, which stood at MYR4.08 as of end-Friday. Nonetheless, local markets continues to remain supported by ample local liquidity as yield for the 10-year benchmark edged lower by 4 bps week-on-week; closing at 4.04%.
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