Monthly Review July 2022
The best performing regional indices were CSI 300 Index (9.62%), Shanghai SE Composite (6.66%) and Hang Seng China Ent Index (3.37%), while the laggards were Korea (-13.15%), Taiwan (-11.79%) and Philippines (-9.14%). Regional currencies generally weakened against the USD. The best performing currencies were Vietnamese Dong (-0.37 %) and Chinese RMB (-0.41 %).
For the month of June 2022, the MSCI Far East ex-Japan Index declined 4.76%, compared to the MSCI World Index’s 8.77% decline.
Major indices in the US declined: Dow Jones Industrial Average (DJIA), S&P 500 and Nasdaq Composite returned -6.71%, -8.39% and -8.71% respectively. For the year to date, the three US indices had tumbled 15.31%, 20.58% and 29.51% respectively. The Federal Reserve (Fed) increased rates by 75bps which was in line with market expectations. Inflation factor continued to keep Fed hawkish. The concerns over global economy going into recession keep risk assets on the decline as investors adjust their projection on corporate earnings outlook. Sentiment remained weak and global cyclical sector took a hit.
The Stoxx Europe 600 Index declined 8.15%. In Europe, gas prices remained at elevated level. The implication on changing monetary policy stance become more complicated for the various Eurozone countries. Thus policy rate adjustment lagged the US and the Euro weakened.
Hong Kong and H shares indices gained, with Hang Seng Index and Hang Seng China Enterprises Index rising 2.08% and 3.37% respectively. China’s A shares index also gained 9.62%. The approval of 60 new online game titles from domestic developers alleviated investors’ concerns over regulatory crackdown on technology sector somewhat. The easing of lockdown in several Chinese cities helped to improve economic activities and sentiment. Consumer price index (CPI) increased 2.1% yoy in May, the same as last month. Monetary policies remained expansionary with RMB loans in May increased by nearly two times from the previous month, and social financing (ie financing provided by the financial system to the real economy) growth rebounded significantly while M2 increased by 11.1% yoy.
South Korea’s KOSPI Index declined 13.15% due to foreign selling amid risk aversion. South Korea’s key consumer sentiment index declined in June from a month earlier, as consumers were pessimistic about the overall economic conditions amid the higher inflationary pressures and tightening monetary policy. The consumer sentiment index for the month declined 6.2 points to 96.4 from May. To ease household financial burden, banks have been asked to make slower adjustment to increase in loan interest rates.
Taiwan’s TWSE Index declined 11.79% on the back of poor business guidance from US technology major and global funds reducing emerging markets technology exposure. The Central Bank of China (Taiwan) is reportedly expected to raise the rediscount rate and may come up with additional measures to further arrest soaring housing prices. Such a move would be the first back-to-back rate hikes by the CBC since 2011. Taiwan’s May export orders reportedly grew 6% yoy to a record-high of US$55.43bn, faster than expectations for a 3% rise. The May yoy increase was the first rise since a 25-month streak of yoy export order growth ended in April.
Singapore’s STI declined 4.03%. Singapore’s annual inflation rate accelerated to 5.6% in May from 5.4% in April. The May inflation number hit the highest level since November 2011, and beating market estimates of 5.5%. The main upward pressure came from cost of food (4.5% vs 4.1% in April); clothing (2.2% vs 0.8%); and housing (5.0% vs 5.0%). On a monthly basis, consumer prices climbed 1.0% in May, compared to a 0.1% fall in April.
Malaysia’s KLCI declined 8.02%. The Malaysia government will provide subsidies worth over RM70 billion to keep the prices of goods and food items lower even though Malaysia’s inflation rate of 2.8% is among the lowest among ASEAN nations, and other developed countries.
Thailand’s SET Index declined 5.72%. The Bank of Thailand maintained its key interest rate at a record low of 0.5% during its June meeting, in line with market consensus, but signaled a rise in policy rate in the future, saying that headline inflation is likely to increase and stay at a higher level longer than previously estimated. Thailand’s headline inflation outstripped forecasts to hit a near 14-year high in June, reinforcing expectations of a rate hike as early as next month.
Jakarta Composite Index declined 3.32%. The Bank Indonesia governor signaled no rate increases. The central bank stated it would not rush to raise the nations’ benchmark interest rate. It is confident in maintaining the BI 7-Day Reverse Repo Rate (BI7DRR) via the June meeting at its current rate of 3.5%, as inflation remained low. While June consumer prices rose at the fastest pace in five years, the annual core inflation rate, which strips out government-controlled and volatile prices, was below market expectations at 2.63% in June, slightly higher than May’s 2.58%.
The Philippines PSE Index declined 9.14%. The Bangko Sentral ng Pilipinas (BSP) raised its key interest rate for a second straight meeting to cool inflation. The benchmark rate was increased by 25bps to 2.5%. BSP Governor Benjamin E. Diokno said upside risks continued to cloud the inflation outlook with pressures arising from the “potential impact of higher global non-oil prices, the continued shortage in domestic fish supply, as well as pending petitions for transport fare hikes due to elevated oil prices
Vietnam’s VN-Index declined 7.36%. The deleveraging from retail investors continued to put pressure on the equity market. Vietnam aims to keep inflation under the targeted 4% cap this year despite rising prices and a stronger dollar, according to a central bank official. Inflation was 2.25% for 5M22, compared to 1.29% for 5M21.
The pace of contraction in economic activities has gathered steamed as global investors placed a higher probability of the world going into a recession. The potential demand disruption from slower growth has started to be manifested in weaker corporate earnings guidance. 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. 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 improve economic activities, and how that might be impacted by China’s responses to Covid-19 situation there.
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 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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