Market Review October 2022
Source : Bloomberg
The markets in ASEAN performed relatively better within Asia region. The best performing regional indices were Jakarta Composite Index (-1.92%), Straits Times Index (-2.84%) and Stock Exch Of Thai Index (-3.02%), while the laggards were Hang Seng China Ent Index (-13.85%), Hang Seng Index (-13.69%) and Kospi Index (-12.81%). Regional currencies were weak against the USD. The best performing currencies were Vietnamese Dong (-1.72%) and Indonesia Rupiah (-2.50%), while the worst was Korea Won (-6.52%) and Taiwan Dollar (-4.29%).
For the month of September 2022, the MSCI Far East ex-Japan Index declined 14.23%, compared to the MSCI World Index’s 9.46% decline. The markets in ASEAN performed relatively better within Asia region.
Risk assets resumed their declines in September. Major indices in the US corrected on renewed Federal Reserve’s hawkish stance, which reiterated its intention to maintain tight monetary policy to tackle soaring inflation.
Dow Jones Industrial Average (DJIA), S&P 500 and Nasdaq Composite returned -8.84%,
-9.34% and -10.50% respectively, bringing the year to date losses to -20.95%, -24.77% and -32.40% respectively. US inflation, as measured by the consumer price index (CPI), increased by 8.3% YoY in August, down from 8.5% in July. However, it remains elevated. US manufacturing activity grew at its slowest pace in nearly 2-1/2 years in September as new orders contracted, as rising interest rates cooled demand for goods. The Institute for Supply Management (ISM)’s manufacturing PMI dropped to 50.9 this month, the lowest reading since May 2020, from 52.8 in August.
The Stoxx Europe 600 Index declined 6.57%. European Central Bank (ECB) raised its key interest rates by an unprecedented 75 basis points. ECB’s deposit rate is now 0.75% above zero and main refinancing rate is 1.25%, the highest level for both since 2011. The euro has been languishing around parity against the dollar for weeks and its sharp fall to two-decade lows this year adds to import costs and raises inflation. The purchasing managers’ index for the 19-nation euro zone fell to 48.4 from 49.6 in August. That marks the third consecutive month below the 50 threshold.
Hong Kong and H shares indices declined, with Hang Seng Index and Hang Seng China Enterprises Index dropping 13.69% and 13.85% respectively. China’s A shares index also declined 6.72%. The concerns on weak yuan accelerated capital outflow from Chinese equities despite rumors of Chinese regulators requesting fund managers and brokers to avoid massive equity sales ahead of Communist Party Congress in mid-October to avoid big market fluctuations. August exports increased 7.1% YoY, compared with the May-July average YoY growth of 17%-18%, significantly lower than market expectations; August imports only edged up 0.3% YoY, remaining weak in performance. The declining export growth reflected global economic slowdown and the high base in the same period last year.
South Korea’s KOSPI Index declined 12.80% amid weaker sentiment on risk aversion. According to Finance Minister, the government is preparing several steps to stabilize the domestic financial market amidst heightened volatility and the KRW’s sharp slide against the USD, on the back of worries over global tightening and economic slowdown. On the domestic front, the Financial Services Commission has decided to extend the loan deferment program for SMEs and small businesses to help ease their payment burden.
Taiwan’s TWSE Index declined 11.07% on consolidation amidst weaker electronics demand outlook. Taiwan raised rate by 12.5 bps in September to 1.625%. August export orders rose to USD 54.59 bil, up 2.0% YoY, exceeding consensus of 1.1% growth. It remains to be seen if the upcoming peak seasonality will help offset the economic downturn.
Singapore’s STI declined 2.84%. The S&P Global Singapore PMI dropped to a five-month low of 56.0 in August from 58.0 in July, reflecting current interest rates and cost pressures. Still, the latest print marked the 21st straight month of increase in the private sector, with growth in output and new orders remaining significant and historically sharp despite softening. Singapore’s seasonally adjusted unemployment rate was at 2.1% in 2Q22, matching the flash figure and edging down from 2.2% in Q1. This was the lowest jobless rate since Q3 2018, as the economy recovered further from COVID disruptions.
Malaysia’s KLCI declined 7.77%. Malaysia’s industrial production in July rose 12.5% from a year earlier, below the 15.2% expected based on a survey of 13 economists in a Reuter’s poll. The central bank said core inflation increased to 3.8% in August versus 3.4% in the previous month. “The increase largely reflected higher prices for rental and food away from home. Notwithstanding the higher annual inflation, 10 of the 12 main Consumer Price Index (CPI) categories registered moderating month-on-month increases,” according to BNM.
Thailand’s SET Index declined 3.02%. The cabinet approved extensions of both the diesel tax cut (THB5 per liter) for two more months and the electricity bill subsidy until December, in an attempt to mitigate the impact of high energy prices. The cabinet also approved an extension of the elimination of excise tax on diesel and bunker oil used to generate electricity. The move will mitigate the negative impact on domestic consumption.
Jakarta Composite Index declined 1.92%. Bank Indonesia increased the policy rate by 50 bps to 4.25%, the largest hike since June 2018. The decision was a pre-emptive and front-loaded move to lower core inflation and inflation expectations, and to maintain exchange rate stability. The Ministry of Finance expects Indonesia’s energy subsidies and compensation to exceed the allocated budget of IDR 502 trillion this year but to lower to IDR 338 trillion assuming global oil prices ease to USD90 per barrel and IDR trades “at a better level”.
The Philippines PSE Index declined 12.80% on negative capital flow. Moody’s Analytics slashed its 2022 gross domestic product (GDP) growth target for the Philippines to 6.8% from the original target of 7.2% as high interest rates and slower global growth challenge Asia-Pacific economies. The revised forecast is still within the 6.5 to 7.5% GDP growth target set by the Development Budget Coordination Committee.
Vietnam’s VN-Index declined 11.590%. Headline inflation declined to 2.89% YoY in August, driven by lower transportation prices with eating out services and travel demand putting pressure on core inflation. Moody’s upgraded Vietnam’s rating to Ba2 from Ba3, outlook changed to stable from positive. The upgrade to Ba2 reflects Vietnam’s growing economic strengths relative to peers, improved policy effectiveness and greater resilience to external macroeconomic shocks, and as the economy continuously benefits from supply chain reconfiguration, export diversification and continued inbound investment in manufacturing.
The contraction in economic activities continued to worry global investors. The potential demand disruption from slower growth has started to be manifested in weaker corporate earnings guidance. The Federal Reserve’s pronouncements of its stance on rates hikes have continued to affect investors’ sentiment and bring about trading volatility. We think, the market has already factored in a higher interest rate environment, somewhat.
The corrections in recent periods present opportunity, especially in Asia ex. Japan, in particular Chinese equities. The positive impacts of expansionary Chinese policies to support economic activities and improving Covid-19 situation in China would improve economic activities. However, some form of lockdowns continues to appear in places, and there remains uncertainty as to how the transition will be going forward. There is continuing concern about issues in China’s property market and its impact on the economy, although measures are being taken to address the issues affecting this sector. The on-going Russia-Ukraine conflict and its significant impact on energy, food and other commodities will continue to weigh on investor sentiments.
We are watchful of developments in the Russia-Ukraine conflict as well as policy directions in the major economies, in particular US and China, which will have major implications on the economies in general as well as on specific sectors. US policy responses will face headwinds going into 2022. Tapering and rate hikes in 2022 will affect liquidity and increase cost of borrowing in the system. In Asia, the focus is on China’s policy measures to spur economic activities and revive growth in the property sector, and how that might be impacted by China’s responses to Covid-19 situation there. The geopolitical risk premium has heightened on Nancy Pelosi’s visit to Taiwan.
While we are more cautiously optimistic, there remains headwind for risk assets, including rising bond yields and interest rate hikes to contain inflation and the relatively high commodity prices (although these have come off to some extent), as well as the still relatively high valuations in the developed markets. The heightened geo-political issues between China and US, and the tension between US/Europe and Russia over Ukraine will keep risk premium elevated at times and result in markets volatility.
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 increasingly socially-aware demands of investors, as well as 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.