Monthly Review September 2022
The markets in ASEAN performed relatively better. The best performing regional indices were Ho Chi Minh Stock Index (+6.15%), PSEi (+4.24%) and Stock Exchange of Thai Index (+3.96%) and while the laggards were China A-shares (-2.19%), Shanghai SE Composite (-1.57%) and Hang Seng Index (-1.00%) Regional currencies were weak against the USD. The best performing currencies were Indonesia Rupiah (-0.07 %) and Malaysia Ringgit (-0.58 %).
For the month of August 2022, the MSCI Far East ex-Japan Index declined 0.99%, compared to the MSCI World Index’s 4.33% decline.
Major indices in the US corrected on Federal Reserve’s hawkish stance, which reiterated its tight monetary policy to tackle soaring inflation. Dow Jones Industrial Average (DJIA), S&P 500 and Nasdaq Composite returned -4.06%, -4.24% and -4.64% respectively. Risk assets resumed their declines in August. Despite strong gains in July, for the year to date, the three US indices still recorded losses of 13.29%, 17.02% and 24.47% respectively. US inflation, as measured by the consumer price index (CPI), increased by 8.5% YoY in July, down from 9.1% in June. However, it remains elevated. The US jobs market continues to be strong with non-farm payrolls growing by a larger-than-expected 528,000 in July.
The Stoxx Europe 600 Index declined 5.29%. In Europe, the energy crisis across the region intensified amid worries over supply and high costs. Russia said it would halt the Nord Stream 1 pipeline, which supplies natural gas to Germany, for three days from 31 August. Inflation continued to rise in the eurozone with annual consumer price index (CPI) inflation expected to surpass the 8.03% recorded in June.
Hong Kong and H shares indices declined, with Hang Seng Index and Hang Seng China Enterprises Index dropping 1.00% and 0.30% respectively. China’s A shares index also declined 2.19%. The official manufacturing PMI was down from 50.2 in June to 49.0 July, dropping back to contractionary territory and lower than market expectations of 50.3. Consumer Price Index (CPI) rose by 2.7% YoY in July, lower than market expectations. CPI growth is expected to reach the target level of 3% in 3Q22 which provide room for authority to be more accommodative on monetary policy.
South Korea’s KOSPI Index strengthens to 0.84% amid weaker sentiment on risk aversion. The Bank of Korea raised its base rate by 25bps to 2.5% as expected. During the media conference, the governor guided to modest but continued rate hikes going forward, putting inflation control as the top policy initiative. Retail sales in South Korea raised 9.7% YoY in July amid eased COVID-19 curbs and the growth in people’s outdoor activities. The combined sales of 25 major offline and online retailers came to 14.17 trillion won (US$10.48 billion) last month, compared with 12.9 trillion won a year earlier, according to the data compiled by the Ministry of Trade, Industry and Energy. It marked the fifth consecutive month of on-year growth.
Taiwan’s TWSE Index gained 0.64% on consolidation amidst weaker electronics demand outlook. July export orders fell 1.9% YoY, missing forecast and Bloomberg consensus. Export orders totaled USD54.26bil in July, down 7.8% MoM (9.1% seasonally adjusted) and 1.9% YoY, far below consensus forecast, on the absence of normal peak. All major categories declined, except electronics, on a larger-than-expected decline in global demand & inventory adjustments.
Singapore’s STI gained 0.31%. Singapore’s annual inflation rate rose to 7.0% in July from 6.7% in the prior month, matching market consensus. This was the fastest rise in consumer prices since June 2008. Food prices were up 6.1% YoY, the most since November 2008. Additional upward pressures also came from cost of clothing (6.6% vs 5.4% in July); housing (5.9% vs 5.5%),; healthcare (2.7% vs 1.9%); transport (19.0% vs 18.8%); recreation & culture (4.9% vs 3.5%); and education (2.2% vs 5.1%). Core consumer prices climbed 4.8% YoY, the most since November 2008, above estimates of 4.7%. On a monthly basis, consumer prices were up 0.2%, the least in 3 months, after a 1% gain in June. The government expects 2022 annual inflation to be between 4.5-5.5%, while core inflation to average between 2.5-3.5%.
Malaysia’s KLCI gained 1.33%. Malaysia inflation accelerated for the fourth straight month to a 14-month high of 4.4% YoY in July (from +3.4% in June). This big jump in headline inflation largely reflected upward adjustments in prices of some essential food items (i.e. chicken, eggs, and cooking oil) and services, the lapse of low base effects in electricity tariffs, and costlier vehicle purchases after the sales tax exemption expired on 30 June 2022 as planned.
Thailand’s SET Index gained 3.97% on bargain hunting. Thailand household debt is at a record high, based on a survey by the University of the Thai Chamber of Commerce. Thai household debt on average stood at 501,711 baht this year, a 3.7% increase from last year. Debt per household was the highest since the center began its annual survey on Thai household debt 13 years ago. This will have negative impact on domestic consumption, though it will be mitigated by increased tourist spending.
Jakarta Composite Index gained 3.27%. Indonesia’s central bank unexpectedly raised borrowing costs for the first time since 2018. Bank Indonesia (BI) raised its seven-day reverse repurchase rate by 25 bps to 3.75%, a move predicted by only seven of 31 economists in a Bloomberg survey. The BI raised its forecasts for headline and core inflation this year and said it sees risks that average price gains could exceed the 2%-4% target not just this year but also in 2023.
The Philippines PSE Index gained 4.24%. The central bank of the Philippines raised its key overnight borrowing rate by another 50bps to 3.75% at its August meeting, the fourth rate hike this year, and in line with market expectations. The overnight deposit and lending facilities rates were also raised by 50 bps to 3.25% and 4.25%, respectively.
Vietnam’s VN-Index gained 6.15%. Vietnam’s industrial production rose by 11.2% YoY in July, the most since May 2021, after a downwardly revised 9.1% growth a month earlier. The latest figure also pointed to the ninth straight month of increases in industrial output, as the economy reopened further in the wake of COVID-19 disruptions. Output growth accelerated for most components, including manufacturing (12.8% vs 9.9% in June), electricity, gas supply (8.7% vs 5.5%), and waste treatment (9.2% vs 6.3%). In contrast, mining output fell 1.5%, reversing from a 5.1% growth in June. For the first seven months of the year, industrial production expanded 8.8% YoY.
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 will affect investors’ sentiment and bring about trading volatility. 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 and moves to exit from the lockdowns in the affected cities 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. 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 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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