Monthly review

December  2011

In December, Asian equity markets were marginally stronger with the MSCI Far East ex Japan Index (MXFEJ) rising by 1.2%. There was a lack of interest in the markets as the Eurozone did not make any significant headway on resolving its sovereign debt crisis.  Although China had started to reduce its reserve requirement ratio (RRR), which is a positive step for markets, there wasn’t any risk appetite to take on new positions before the end 2011.

 Going forward, we expect the market choppiness to continue during the first few months of 2012 before the investment landscape becomes clearer and potentially more positive thereafter.  This is, of course, barring a breakup of the Euro in 2012.

 The first few months of 2012 are likely to continue to be choppy for the following reasons.  First, peak refinancing requirements of over €400bn for the Eurozone will occur in the first four months of 2012.  Despite the ECB’s long term refinancing operations (LTRO), Italy’s 10-year bonds are still trading at above 7%—a yield considered by private economist to be financially unsustainable for the country.  Clearly, the concerns over the fate of the Euro and the Eurozone have gone beyond worrying about Greece’s fiscal position to focussing on Italy’s.  With over €55bn due for refinancing for Italy in February 2012, investors are likely to remain cautious in the near term. 

 Second, given the tight monetary policy adopted throughout much of 2011, the impact is starting to be felt but the risk now is that China’s GDP growth may decelerate faster-than-expected and may spring negative surprises in 1Q 2012.  Although the most recent data points from China indicate that the economy is not decelerating rapidly as evidenced by the December PMI of 50.3 points (vs 49.0 points in November), the strength in the PMI was led, unsurprisingly, by seasonal production which would likely have been caused by the early arrival of the lunar New Year.

 Third, the manufacturing activities of export-dependent Asian countries continue to weaken and the earnings of companies in these countries remain at risk of further downgrades.  South Korea’s manufacturing activities, for example, have contracted for the fifth straight month to December while Taiwan’s have declined for a seventh month in a row, due mainly to a slowdown in demand for electronic products.  Similarly, Singapore’s weak 4Q 11 GDP was mainly dragged down by a 21.7% decline in manufacturing.

 On a more positive note, although global and regional economies are slowing down, Asian policy makers have the ability to shift from tightening measures to more accommodative growth policies.  China, for instance, has started to signal a more relaxed monetary policy by cutting its reserve requirement ratio in November 2011.  Second, valuations provide support to downside risks, in particular for markets like China/Hong Kong (H-Share FY11PE of 7.5x vs 10yr mean of 13.6x), Taiwan (12.8x FY11 vs 18.6x mean) and Korea (8.9x FY11 vs 15.4x mean).

 Hence, given the expectations of a choppy market, we continue to remain selective and retain a vigilant and opportunistic approach, seeking to buy on dips.  Although the global slowdown has affected sentiment and earnings, valuations continue to favour the larger markets like China/Hong Kong, Taiwan, Korea and, selectively, some companies in Singapore.  Generally, within the region, we find value in banks, plantation, and oil and gas services companies.  On stock picks, we will continue to adopt a value approach, seeking out stocks with favourable valuations and strong fundamentals.

 However, despite some of these positive policies from major economies, there are a number of nascent threats looming in the background—this should ensure that equity markets remain choppy and volatile.  Global production output is showing signs of strain.  Market’s global purchasing managers index (PMI) continued to edge lower to 49.6 points in November (49.9 pts in October) with weakness shown in China and the Eurozone.  Only the US showed some manufacturing growth.  China’s PMI slipped below 50 points to 49.0 in November, the first contraction in about 3 years.  Second, despite the best efforts of Eurozone leaders, the chances of the break-up of the Euro is becoming so high that Eurozone businesses are now preparing for just such a scenario.  Third, rating agencies have warned of further downgrades of Eurozone sovereigns which will affect the EFSF ability to raise funding.  Should the downgrades happen, one of the last options left would be to allow the ECB to monetise, which Germany has so far resisted.

 Hence, given this background, we continue to remain selective and retain the approach from the previous months.  We seek to buy on dips without being overly aggressive.  Valuations continue to favour the larger markets like China/Hong Kong, Taiwan and Korea.  ASEAN markets have rebounded with other regional markets and remain at a premium to the larger markets and we will be more selective in these markets when adding exposure.  Generally, within the region, we find value in banks, plantation, and oil and gas services companies.

Disclaimer : Information herein has been obtained from and is based upon sources Pheim Unit Trusts believe to be reliable, we do not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute Pheim Unit Trusts’ judgment as of the date of the report and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of units.