Market Review August 2023
For the month of July 2023, the MSCI Far East ex-Japan Index gained 6.24%, compared to the MSCI World Index’s 3.29% gain. The performance of the Far East ex-Japan markets gained momentum from the previous month’s gain on the back of a stronger recovery in Chinese risk assets which had squeezed short positions. The ASEAN Index performed in line, gaining 6.34%. Markets that performed relatively better were Vietnam (+9.17% in local currency term), China H shares (+7.38%) and Malaysia (+6.01%), while the laggards were Taiwan shares (+1.36%), Philippines shares (+1.91%) and Korea shares (+2.66%). Performances of regional currencies was mixed against the USD. The best performing currencies were Malaysia Ringgit (+3.55%) and Korean Won (+3.41%), while the laggards were Taiwan NT (-0.96%) and Vietnam Dong (-0.45%).
Major US indices continued to rise, though the pace softened. The market performed well on resilient economy activities data and improved expectation of a soft landing of the US economy, instead of a second half recessionary economy. The general buoyant second quarter result announcements helped to improve investors sentiment. Dow Jones Industrial Average (DJIA), S&P 500 and Nasdaq Composite returned +3.35%, +3.11% and +4.05% respectively. The headline inflation fell more than expected to 3% YoY (from 4% previously), although core inflation remained stickier at 4.8% YoY. The Federal Reserve (the Fed) raised its key policy rate by 25 basis points (bps) to take the Fed funds rate to 5.25%-5.50%, in line with market expectations.
The Stoxx Europe 600 Index gained 2.04%. The European Central Bank (ECB) also raised rates in July, increasing the deposit rate 25bps to 3.75% in line with its earlier guidance. The ECB’s stance on policy outlook was more dovish due to falling eurozone inflation and weaker activity data leading up to its July meeting. The eurozone composite purchasing managers’ index (PMI) fell to a preliminary 48.9 in July, suggesting modest economic contraction over the month. The manufacturing PMI dropped yet further to a post-Covid low of 42.7.
Hong Kong and H shares indices gained on bargain hunting, however trading volatility remained elevated. Hang Seng Index and Hang Seng China Enterprises Index gained 6.15% and 7.38% respectively on pro-growth policies announcement by Chinese authority. China’s A shares index also gained 6.11%, compared to the previous month’s loss. During the Politburo meeting, the Chinese government acknowledged challenges faced by the economy and called for counter-cyclical policies. It is the first time the Politburo meeting had mentioned countercyclical policy adjustment since 2020. The Chinese government is determined to maintain a healthy economy environment which is positive for businesses.
South Korea’s KOSPI Index gained 2.66% on foreign fund inflow despite weak economic data. The IMF lowered S. Korea’s growth forecast to 1.4%, marking the 5th consecutive downward revision. Korea’s household debt has reached unsustainable levels, with the household debt-to-GDP ratio standing at 105% in 4Q22 which would negatively affect domestic consumption.
Taiwan’s TWSE Index made a marginal gain of 1.36%. The poor share performance of heavy weighting TSMC following its weak result announcement was a drag on the index. Taiwanese exports remained weak and continued to fall for the tenth consecutive month in June. The export orders totaled US$44.18bn in June, down 3.3% MoM (down 5.2% seasonally adjusted) and 24.9% YoY. The decline is greater than last month’s 17.6% contraction, as well as consensus of 20.3% YoY decline.
Singapore’s STI gained 5.24%. Based on advance estimate, Singapore’s GDP grew by 0.7% YoY in 2Q23, stronger than a final 0.4% growth in 1Q and above market expectations of a 0.6% growth. This was the 10th consecutive quarter of increase, on the back of an acceleration in the services sector (3.0% vs 1.8% in 1Q) on the back of a rebound in wholesale & retail trade, alongside a faster rise in the output of information & communications and a further increase in accommodation & food service, real estate, and other services.
Malaysia’s KLCI gained 6.01% on domestic fund buying and optimism on the upcoming election in 6 States. Malaysia’s investment momentum, which has seen strong growth since Q1 2023, is expected to maintain its upward trajectory in Q2 2023, according to the Minister of Investment, Trade and Industry (MITI), Tengku Datuk Seri Zafrul Abdul Aziz.
Thailand’s SET Index gained 3.52% on positive sentiment, despite the delay in the formation of a new government following the General Election in May 2023. The consumer confidence index of the University of the Thai Chamber of Commerce improved for the twelfth month in a row, to 56.7 in June 2023, up from 55.7 the previous month. It was the highest reading since February of 2020, bolstered by sustained tourist recovery and the expectation of at least 25 million visitors in 2023. However, political uncertainty is weighing on consumer sentiments.
Jakarta Composite Index gained 4.05%. Trade data suggests weaker economic activities both in internal and external demand. Indonesia experienced a decline in its monthly export value in June, with a decrease of USD1.1bn to USD20.6bn compared to May’s USD21.7bn, resulting in a contraction of 21.2% YoY (vs. 1.0% YoY expansion in May). Similarly, the value of imports significantly decreased, by USD4.1bn to USD 17.2bn (vs. USD21.3bn in May), showing an 18.3% YoY contraction (vs. 14.4% YoY expansion in May).
The Philippines PSE Index gained 1.91%. Inflation figure in June continued to decline, coming in at 5.4%. It is the fourth consecutive month of decline. On a positive note, the International Monetary Fund (IMF) raised its growth outlook for the Philippines to 6.2% this year from the 6% forecast it gave in April, as domestic demand is expected to remain robust.
Vietnam’s VN-Index gained 9.17%, driven by positive second quarter corporate earnings announcements. External demand continued to be a drag however. In the first half of 2023, Vietnam’s exports declined 12.0% YoY to USD164.7bn while imports dropped 18.4% YoY to USD151.8bn, leading to a trade surplus of USD12.8bn (which increased to USD13.2bn as of July 15, 2023). The weak import data and recently poor Manufacturing Purchasing Manager Index reading of 46.3 in June reaffirmed the weak domestic demand.
The string of rate hikes since 2021 and their impact on economic growth, in particular how severe the global economic recession will be, will remain the focus of investors’ concern. US corporate earnings had surprised on the upside and resilient employment and consumption data have raised expectation of a soft landing for the US economy, although a recession can still not be ruled out. Geo-political developments will remain on investors’ radar screen. US economic data and interest rate trend and expectation on the Fed’s rate decisions will continue to have a major influence on investors’ investment decisions on risk assets. The easing of inflation rate in recent months has lifted investors’ sentiment, in particular in US risk assets. The US headline consumer price index (CPI) continued to ease with the latest reading at 3.0% in June.
The market corrections in recent periods would present opportunities, in particular in Chinese equities on depressed valuation, and expansionary Chinese policies to support economic activities.
We remain watchful of geo-political developments as well as policy directions in the major economies, in particular US and China. US economic and inflation data and policy responses in terms of rate hikes in 2023 will affect market sentiments and liquidity, not just in the US but world wide. The market seems to have factored in a peak in interest rates in 2023, though risk remains. In Asia, the focus is on the extent of China’s economic recovery following the end of its “zero Covid” policy. China’s economic data post-Covid have been weaker than expected. The Chinese property sector recovery remains weak, and any sign of stabilization will have positive catalyst for the economy and risk assets. The Chinese government has made known its intention to take counter-cyclical policy measures to maintain a healthy economic environment.
While we are cautiously optimistic, there remains headwind for risk assets, including high interest rate and slower economic activities in 2023, as well as the still relatively high valuations in the developed markets. The continuing geo-political tension in Europe and in East Asia can have major implications for businesses and economic activities, and will keep risk premium elevated at times and result in markets volatility. We will be watchful on these.
We continue to apply our strategy of focusing on identifying fundamentally healthy companies with low valuations, low leverage, high growth, robust management and a strong track record, and adherence to our investment philosophy of “Never Fully Invest at All Times” which has served us well over the years. We are also in the midst of developing a robust ESG investment framework to meet the increased expectations of investors and other stakeholders.
We thank you once again for your continued faith in us, and hope to remain good stewards in our endeavour to protect and grow your capital.
This article is solely for information purposes. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument, investment product or service. The information contained herein does not have any regard to the specific investment objectives, financial situation or particular needs of any person. Investors may wish to seek advice from a financial advisor before making any investment decision. Past performance is not indicative of future results. An investment is subject to investment risks, including the possible loss of the principal amount invested.