Monthly Review August 2022

The best performing regional indices were S&P BSE Sensex Index (+8.58%), S&P/ ASX 200 Index (+5.74%) and KOSPI Index (+5.10%) while the laggards were China H-shares (-10.19%), Hong Kong (-7.79%) and China A-shares (-7.02%). Regional currencies’ performances against the USD were mixed. The best performing currencies were Singapore dollar (+0.64 %) and Indonesia Rupiah (+0.42 %).

For the month of July 2022, the MSCI Far East ex-Japan Index declined 3.45%, compared to the MSCI World Index’s 7.86% rise.

Major indices in the US made strong gains on resilient second quarter corporate earnings delivery: Dow Jones Industrial Average (DJIA), S&P 500 and Nasdaq Composite returned +6.73%, +9.11% and +12.35% respectively. Despite the good gains in July, for the year to date, the three US indices still recorded losses of 9.61%, 13.34% and 20.80% respectively.  The Federal Reserve (Fed) made a second consecutive 0.75% rate rise which was in line with market expectations. Inflation factor continued to keep Fed hawkish. The better than expected second quarter corporate results, in general, kept the indices buoyant as investors drove risk assets higher after sharp corrections in previous month.

The Stoxx Europe 600 Index gained 7.64%. In Europe, high inflation pushed the Central Bank (ECB) to deliver its first interest rate hike in over a decade, taking the Eurozone out of negative rates. European recessionary risk was most apparent in currency markets where the euro briefly slipped below parity with the dollar before rallying slightly in response to the ECB’s move.

Hong Kong and H shares indices declined, with Hang Seng Index and Hang Seng China Enterprises Index dropping 7.79% and 10.19% respectively. China’s A shares index also declined 7.02%. The macro headwind continued to dampen investors’ interest in Chinese equities with China reporting a first half gross domestic product (GDP) growth rate of a mere 2.5%. Growing move by home purchasers to boycott mortgage payments on abandoned projects raised concerns for recovery of the property sector and its negative impact on economic activities. The index heavy technology sector also took some beating on news of Jack Ma giving up control for Ant Financial which was taken as having potentially negative earnings impact for Alibaba.

South Korea’s KOSPI Index gained 5.10% on bargain hunting. Bank of Korea (BOK) Governor increased the rates by an unprecedented 50bps to 2.25% to tackle inflation. BOK is expecting inflation to peak in 3Q or 4Q and further increases in rates in the rest of the year to be more moderate. Retail sales remained healthy as an increase in household interest burden does not necessarily lead to a contraction in consumption, as interest expenses account for only 2.3% of total household disposable income.

Taiwan’s TWSE Index gained 1.18% on consolidation amidst weaker electronics demand outlook. Taiwanese economy expanded 3.08% YoY in the second quarter, moderating from 3.14% in the previous quarter, the slowest growth in the last two years, amid resurgence in Covid-19 infections in the country and in China which caused disruptions to supply chains and impacted on exports. Consumer Confidence Index declined to 63.05 in July, the lowest since November 2009.

Singapore’s STI gained 3.52%. Singapore’s retail sales rose by 17.8% y.oy in May, the most since June 2021, accelerating from a 12.1% gain a month earlier. This was also the third straight month of growth in retail trade, lifted by a further recovery in consumption following a full reopening of the economy. Sales growth accelerated for food & alcohol (47.3% vs 38.4% in April), cosmetics, toiletries (19.5% vs 17.7%), wearing apparel (98.2% vs 46.8%), petrol services (45.8% vs 24.5%), recreational goods (35.2% vs 8.0%, others (24.1% vs 6.1%), and in department stores (73.1% vs 31.3%). On a monthly basis, retail sales gained 1.8% in May, accelerating from a marginally revised 1.1% rise in April.

Malaysia’s KLCI gained 3.32%.  Malaysia s economic growth is expected to remain strong in the second quarter of this year, driven by several economic indicators, among them, the increase in the country’s trade which surged 43.4% in June 2022, hitting a new high of RM270.4 bil. The labour market also saw improvement with the unemployment rate declining to 3.9% in May 2022 compared with 4.5% in the same month in 2021.

Thailand’s SET Index gained 0.52%. The headline inflation continued to climb in June, driven by food and energy costs, and a weak baht. Inflation surged to +7.7% from a year ago (vs. +7.1% in May), while rising by +0.9% from the previous month (vs. +1.4% in May). Core inflation (excluding raw food and energy) picked up +2.5% (vs. +2.3% in May), the fastest pace since Mar 2012, while rising by +0.2% on m.o.m basis (similar to May).

Jakarta Composite Index gained 0.57%. Foreign direct investment into Indonesia (excluding investment in banking and the oil and gas sectors) jumped 39.7% YoY to a fresh record high of IDR 163.2 tril (USD 10.89 bil) in the second quarter of 2022, the biggest rise in the past decade, and accelerating from a 31.8% growth in the previous period, amid efforts by the government to ease business and licensing rules as COVID-19 situations improved further.

The Philippines PSE Index gained 2.61%.  Fitch lowered its GDP growth forecast for the Philippines to 6.5% this year, from 6.9% previously, citing continued inflationary pressures due to high prices of food and other commodities. On 14th July, in an unscheduled move, the Philippines central bank (“BSP”) unexpectedly raised its key interest rate by 75 basis points, its highest hike ever, to 3.25%. The BSP said significant tightening was needed due to signs of sustained, broadening price pressures and left the door open for further tightening.

Vietnam’s VN-Index gained 0.73%. The S&P Global Vietnam Manufacturing PMI declined to 54.0 in June 2022 from a 13-month high of 54.7 in May. Still, the latest reading pointed to the ninth straight month of expansion in factory activity.

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. However, second quarter earnings announcements in the US brought optimism to risk assets. The index volatility remains elevated.

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 and moves to exit from the lockdowns in the affected cities would improve economic activities, although there remains some uncertainty as to how the transition will be going forward. There is also continuing concern about issues in China’s property market and its impact on the economy. The on-going Russia-Ukraine conflict event with its significant impact on energy, food and other commodities has increased risk premium significantly.

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 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.

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