Monthly Review June 2022
The best performing regional indices were Shanghai SE Composite (+4.57%), CSI 300 Index (1.87%) and Hang Seng Chine Ent Index (1.62%), while the laggards were Ho Chi Minh Stock Index (-5.42%), Straits Times Index (-3.71%), ASX 200 Index (-3.01%). Regional currencies’ performance against the USD was mixed. The best performing currencies were Korean Won (+1.71 %) and Taiwan NT (+1.50 %).
For the month of May 2022, the MSCI Far East ex-Japan Index gained 1.35%, compared to the MSCI World Index’s 0.16% decline.
Major indices in the US had mixed performance: Dow Jones Industrial Average (DJIA), S&P 500 and Nasdaq Composite returned +0.04%, +0.01% and -2.05% respectively. The Federal Reserve (Fed) increased rates by 50bps which was in line with market expectations. The market is also expecting another two rate hikes in the coming two months. Headline inflation came in above expectations but fell marginally to 8.3% year over year. The heightened inflation environment led the Fed Chairman to be hawkish.
The Stoxx Europe 600 Index dropped 1.56%. In Europe, gas prices remained at elevated level. Labour markets continued to tighten. UK unemployment fell to the lowest level since 1974, while Eurozone unemployment is now the lowest on record. This supported acceleration in wage growth in Europe, but with inflation very high, real wage growth was negative.
Hong Kong and H shares indices gained, with Hang Seng Index and Hang Seng China Enterprises Index increasing 1.54% and 1.62% respectively. China’s A shares index also gained 1.87%. Lockdown in several Chinese cities as a result of Covid-19 outbreak continued to impact economic activities. Chinese credit growth slowed during May as banks, concerned about the worsening economic situation, cut back on loan issuance. In response, the People’s Bank of China put pressure on them to increase loan issuance and cut a key mortgage reference rate by 15bps to support the property sector. Global funds have reduced their holdings of China stocks, and their underweight in China is at ten year low, according to one report. However, the upcoming reopening of cities from Covid restrictions has improved sentiment.
South Korea’s KOSPI Index declined 0.34% in line with regional index. South Korea’s household loans at the nation’s top five commercial banks YTD were down by roughly W2tr (USD1.65bil) per month while internet banks saw a monthly average increase of W900bil (USD740m). YTD loans at online banks were up +8% from W36.1tr (USD29.7bil) as of end-2021. The increase was attributed to online banks offering more loans to those with lower credit ratings. However, the government currently has no intention of intervening given the overall declining trend of household loans.
Taiwan’s TWSE Index gained 1.30%. The index recovered after sharp correction in the prior month. Central Bank of China (Taiwan) may revise down its economic growth forecast for Taiwan this year due to impacts of the Ukraine war and COVID-19 despite better-than-expected 1Q22 GDP growth of 3.06%. The central bank sees imported inflation accelerating in 2Q22 before coming down in 2H22 though it would remain above 2%.
Singapore’s STI declined 3.71%. Singapore’s manufacturing production advanced 6.2% YoY in April, beating market estimates of a 5.1% rise and accelerating from an upwardly revised 5.1% gain in March. The latest reading pointed to the seventh straight month of increase in manufacturing output amid further easing of COVID-19 restrictions. On a monthly basis, manufacturing output grew 2.2%, rebounding from a downwardly revised 11.2% fall in March, and compared with forecasts of an 8.1% growth.
Malaysia’s KLCI declined 1.90%. Malaysia’s Producer Price Index (PPI) for local production, which measures the costs of goods at the factory gate, continued to register a double-digit growth of 11% in April. It was, however, slightly lower compared with the 11.6% YoY growth recorded in March 2022. The higher cost of production will be likely to impact margin and earnings going forward.
Thailand’s SET Index declined 0.24%. The commercial banking sector showed strong growth in the personal loan category during 1Q22 because of greater household demand for liquidity to support daily spending needs amid the economic doldrums. According to the Bank of Thailand, the commercial banking industry’s personal loans grew 6.6% YoY in 1Q22, the largest expansion among all loan products, although it was a decrease from the 7.8% growth recorded in 4Q21.
Jakarta Composite Index declined 1.11%. Indonesia’s 1Q22 GDP increased by +5.01% YoY, above expectations of a +4.95% growth, as a result of improving economic activities following the lifting of Covid-19 restrictions earlier this year. Leading the growth was transportation and storage which grew by +15.79% YoY, and exports of goods and services, which grew by +16.22%.
The Philippines PSE Index gained 0.65%. Ferdinand Marcos Jr clinched a stunning runaway victory in the Philippines’ presidential election. The Philippines’ GDP expanded more than expected in 1Q22, at +8.3% YoY. On the demand side, Household Final Consumption Expenditure (HFCE) grew by 10.1% in the first quarter of 2022 while Government Final Consumption Expenditure (GFCE) grew 3.6%. Gross Capital Formation (GCF) increased +20.0%, Exports of goods and services +10.3%; and Imports of goods and services +15.6%.
Vietnam’s VN-Index declined by 5.42%. The deleveraging from retail investors had led to heavy selling pressure. Vietrilam’s industrial production rose by 10.4% YoY in May, slowing from the previous month’s revised 11.1% gain. It was the seventh straight month of increases. Output growth moderated for both mining (4.2% vs 7.9% in April) and electricity and gas supply (2.4% vs 8.6%). At the same time, production grew faster for both manufacturing production (12.1% vs 11.7%) and water supply and waste treatment (5.5% vs 2.7%). For the first five months of the year, industrial output had advanced 8.3% YoY.
Given the corrections in recent periods, we see room for more optimism on risk assets on valuation becoming more attractive, especially in Asia ex. Japan, as well as the positive impacts of expansionary Chinese policies to support economic activities. 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. 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 hike in 2022 will affect liquidity and increase cost of borrowing in the system. In Asia, the focus is on China’s policy responses to reopening of cities due to COVID-19 resurgence, and China’s Covid-19 policy going forward.
While we are more cautiously optimistic, there remains headwind for risk assets, including rising bond yields and interest rate hikes to contain inflation and relatively high commodity prices, as well as the still relatively high valuations in the developed markets. The geo-political issues between China and US, and the new tension between US/Europe and Russia over Ukraine will keep risk premium elevated at times and result in markets volatility.
We are adding to risk assets as valuation become more attractive. 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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