Market Review May 2024

Globally, risk asset performance in April 2024 was mixed. However, the Far East ex-Japan index outshone developed markets. The MSCI Far East ex-Japan Index rose by 0.84%, whereas the MSCI World Index declined by 3.85%. Among Far East ex-Japan markets, Hong Kong and Chinese shares performed strongly, while ASEAN equities trailed behind with a return of 1.83%, except for Singapore shares (2.13% in local terms) and Malaysia shares (+2.60%). Hong Kong shares (+7.39%) and Chinese H shares (+7.97%) led in performance. Vietnam (-5.81%), Philippines (-2.94%), and Korea (-1.99%) were the underperformers. Regional currencies weakened against the USD, with the Chinese Yuan (-0.26%), Malaysian Ringgit (-0.99%), and Singapore dollar (-1.19%) as top performers, and the Korean won (-2.52%) and Indonesian Rupiah (-2.48%) as the weakest.

The major US indices experienced declines due to a market correction triggered by higher inflation data and increased risk premium amid escalating conflicts in the Middle East. Despite resilient private demand, the combination of higher inflation data tempered expectations of a potential rate cut for 2024. The Dow Jones Industrial Average (DJIA), S&P 500, and Nasdaq Composite returned down by 5.00%, 4.16%, and 4.41%, respectively. US inflation surpassed expectations, reaching 3.5% year-on-year in March. However, economic data remained resilient, with the US composite Purchasing Managers’ Index (PMI) recording 51.3 in April, indicating continued expansion in activity.

The Stoxx Europe 600 Index mirrored the decline in developed markets, dropping by 1.52%. In April, the eurozone flash composite PMI surged to 51.4, a notable increase from the recessionary level of 46.1 in March, while the UK’s composite PMI expanded to 54 from 52.8 in March. Eurozone inflation held steady at 2.4% year-on-year in April, while UK headline inflation eased. With a less inflationary environment and expectations of stable but sluggish growth in the euro area and UK, markets anticipate potential rate cuts from the European Central Bank (ECB) and Bank of England (BoE). The first cut from the ECB is still anticipated over the summer.

Hong Kong and H shares indices experienced a surge, driven by momentum from foreign fund inflows. The Hang Seng Index soared by 7.39%, while the Hang Seng China Enterprises Index and China’s A shares index surged by 7.97% and 1.89%, respectively. China’s GDP grew by 5.3% in the January-to-March period compared to a year earlier, surpassing the median estimate of 4.8% in a Bloomberg survey of economists and slightly above the 5.2% growth rate in the final quarter of 2023. Manufacturing activity in China remained in expansionary mode in April, with the China manufacturing PMI registering at 50.4, marking the second time in six months that the index has risen above 50.

Despite strength in export figures, South Korea’s KOSPI Index experienced a decline of 1.99%. South Korea’s export volume has been on the rise for the seventh consecutive month, driven by robust demand for locally manufactured tech products. According to the Bank of Korea (BOK), the export volume index increased by 0.1% in March compared to the previous year, maintaining its upward trend since September of last year.

Taiwan’s TWSE Index rose by 0.50% due to profit-taking activities. Taiwan’s economy experienced its most rapid expansion in nearly three years, driven by global demand for artificial intelligence-related technologies, leading to a surge in exports. In the first quarter, Taiwan’s GDP grew by 6.51% year-on-year, reaching NT$5.46 trillion [approximately US$168 billion], marking the fastest pace of growth since the 2QFY2021.

Singapore’s STI continued its recovery, posting a mild gain of 2.13%, supported by positive corporate earnings announcements from banking sectors. In March, Singapore’s annual inflation rate slowed to 2.7%, down from 3.4% in the previous month and below market expectations of 3.1%. This marked the lowest reading since September 2021, as inflation eased across most sub-indexes, particularly in food (3% vs. 3.8% in February), housing & utilities (3.7% vs. 3.9%), and transport (0.9% vs. 2.3%). On a monthly basis, the Consumer Price Index (CPI) declined by 0.1%, following a 1% rise in the previous period.

Malaysia’s KLCI saw a gain of 2.60% driven by robust domestic inflows. Official data revealed that Malaysia’s Leading Index, offering early insights into significant shifts in the business cycle and economic direction in the near term, grew by 2% in February. The Department of Statistics Malaysia (DOSM) stated in a release that this consistent growth over three consecutive months reflects an optimistic economic outlook for the 2QFY2024.

Thailand’s SET Index weakened further, declining by 0.72%. Industrial output in Thailand extended its decline for the 18th consecutive month in March, primarily due to continued decreases in automotive manufacturing amidst high household debt and interest rates. The manufacturing production index fell by 5.13% compared to the previous year, marking the sharpest decline since September and accelerating from a revised 2.79% decrease in February, as reported by the Ministry of Industry.

The Jakarta Composite Index also declined by 0.75%. Indonesia’s central bank unexpectedly raised interest rates in a bid to bolster the Rupiah currency against global risk aversion and a delay in anticipated U.S. policy easing. Bank Indonesia increased both the overnight deposit facility and lending facility rates to 5.50% and 7.00%, respectively.

Meanwhile, the Philippines PSE Index dropped by 2.94%. The government budget deficit narrowed to PHP 195.9 billion in March 2024 from PHP 210.3 billion in the same month a year earlier. Despite a slight decline in tax collections due to fewer working days in the month, government revenues increased by 11.3% to PHP 287.9 billion year-on-year.

Vietnam’s VN-Index experienced a significant drop of 5.81% amid concerns over leadership changes in the National Assembly and currency depreciation. Foreign investors continued to sell off Vietnamese assets, with net sales reaching USD 213 million in April, continuing the trend from Q1 2024. Year-to-date, cumulative foreign net outflows has reached USD 680 million. The arrest of Pham Thai Ha, Deputy Head of the National Assembly Office, and the resignation of National Assembly Chairman Vuong Dinh Hue due to violations of Party regulations have added to the uncertainty.

After many months of rate hikes by the US Fed to beat inflations, the easing of inflation rate in the US in recent months has raised market expectations that that rates may start to fall.  Fed officials have provided forecasts of several rate cuts at the beginning of 2024, although whether this will materialize will depend on the economic data when the time comes. The market has been hopeful of rate cuts starting as early as March, but the prospect of this happening has been pushed back to the second half of 2024. However, the recent inflation data has further dampened expectation of rate cut in terms of the timing and number of cuts.

So far, resilient US economic data, good corporate results from big US techs, the plays on companies benefiting from AI and the prospect of US rate cuts have boosted investor sentiments and pushed the US stock market higher, breaching new historical records.

US economic and inflation data, and expectation on, and Fed’s rate decisions, will continue to have a major influence on investors’ investment decisions on risk assets in US and elsewhere. Investors are pricing in a lower interest rate environment as early as 2HFY2024. This, coupled with better than expected earnings reports and an economy that is more resilient than expected, has kept investment sentiment buoyant, despite the US market’s elevated valuation and continuation of geo-political tension.

We are watchful of geo-political developments as well as policy directions in the major economies, in particular US and China.  The continuing Israel-Hamas conflict, and the risk that it may potentially spread in the Middle East, has added to the uncertainties. US economic and inflation data and interest rate policy responses will affect market sentiments and liquidity. In the run up to the U.S Presidential election in November, increasing attention will also be focused on who will win the race, and how it will affect the US policies.  In Asia, the focus is on the pace of China’s economic recovery which has been weaker than expected. The Chinese property sector continues to face severe challenges, and any sign of stabilization and growth will have positive catalyst for China’s economy and risk assets. The Chinese government has announced various support measures to help the economy, and the market expectation is that more will be required, and it may take time for the initiatives to bear fruits.

While we are cautiously optimistic, there remains headwind for risk assets, including continuation of high interest rate and its impact on business and economic activities, and slower than expected economic growth in China, as well as the relatively high valuations in the developed markets. The continuing geo-political tension in Europe and in East Asia, and the new conflict in the Middle East will keep risk premium elevated at times and result in markets volatility. We will be watchful on these.

The prolonged sell down of Chinese equities and their depressed valuation may offer potential upside on expansionary Chinese policies to support economic activities.

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 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.