Christopher Chu, Fund Manager – Asian equities, Union Bancaire Privée (UBP)
Global bourses extended year to date gains amid expectations that President Trump would enact tax cuts and infrastructure spending to spur growth in the US. Market momentum faded towards the end of February as concerns surfaced that campaign promises would not materialize given the administration’s vacillation over its top priorities and struggles with domestic obstacles in part the product of party division. Asian stocks followed world equities, climbing higher following better trade data emerging from the region’s larger economies. The MSCI Asia ex Japan index returned 3.4% over the month.
MSCI China advanced 3.6% over the reported period. China’s January factory PMI data expanded to 51.3 reflecting ongoing stabilization in the economy. The People’s Bank of China’s foreign exchange reserves fell by US$12bn, underlining the central bank’s continued effort to stabilize its currency. FX reserves have fallen below the US$3trn level, as the RMB has appreciated about 1% against the USD year to date.
The MSCI India rose 4.0%. The central government announced its FY18 budget which aims to target the deficit at 3.2% of GDP underpinned by controlled fiscal spending and contained borrowing. The budget was mostly focused on rural and social development. The Reserve Bank of India confounded expectations by leaving interest rates unchanged for the second consecutive meeting, citing its preference to continue monitoring the impact of demonetization.
North Asian markets rallied as trade data remained robust and protectionist rhetoric lost some of its ferocity. MSCI Korea inched 0.24% higher while MSCI Taiwan rose 2.6%. Korean exports rose 26.2% YoY for the first 20 days in February, with the recovery in petrochemicals boding positively for Korean exports. Taiwan’s final 4Q16 GDP came in at 2.88%, better than the consensus 2.60%.
ASEAN equities were mixed but closed the month higher as a recovery in commodity prices lifted terms of trade in the region. MSCI Singapore returned 1.6%. The 2017 Singapore Budget was less supportive for growth than anticipated, highlighting the government’s preference to pull back on spending. MSCI Indonesia jumped 2.2% following a peaceful first round vote during the Jakarta governor election. MSCI Malaysia rose 1.7%. Underperformers included MSCI Thailand and MSCI Philippines, falling 0.5% and 0.3% respectively over the reported period.
Since the US election, global stocks have rallied on expectations that Trump’s administration would deliver on its campaign promises of lower taxes and infrastructure spending, supporting the argument for a ‘benefit of the doubt’ trade. As robust economic data emanated from the US, the rally was protracted, with better jobs data keeping the Dow Jones Industrial Average above the 20k level reached in late January.
In the days leading up to Trump’s inaugural speech to Congress at the end of February, market momentum appeared somewhat lethargic as campaign promises appeared to go unfulfilled with any implementation to occur later in 2017 or even in 2018. Given the bullish tone since November, the political disappointment could weigh on sentiment if US economic momentum starts to ebb as a result.
Despite the distractions, it is sensible to maintain a constructive outlook for Asia as the region is not only supported by improving economic data but sound policies aimed at mitigating financial risks. In China, the PBOC’s FX reserve fell to its lowest point since 2011 amid ongoing efforts to stabilize the currency. Though the FX reserves fell below the psychological $3trn level, deployment attenuates Trump’s criticism that Beijing is weakening its currency to benefit trade.
In India the nation’s budget proposals appear reasonable, while the absence of a capital gains tax was seen as investor friendly. Overall, the economic drag caused by demonetization appears to be fading, with the success of this programme anchored on what the government’s decides to do next. Despite the nationwide inconvenience and a lower than expected exposure of illegal accounts, the PM’s approval ratings remain high, providing enough political capital to move his agenda forward. The introduction of his goods and service tax plan remains on track for implementation this year, though is likely to take place in July rather than the earlier expectations of an April commencement.
In ASEAN, economic data remains upbeat, lifted by domestic public spending and rising commodity prices. Better relations with China bodes positively for ASEAN’s outlook, which strives to improve relations over the territorial seas in exchange for greater trade and cooperation. Though the bias for a stronger USD tightens external financial conditions, ASEAN currencies appear undervalued and stable. There is anticipation around the likelihood of the Federal Reserve raising interest rates two to three times this year, given tightness in the labour market and a pickup in energy prices. These increases are probably already priced in the market since their announcement has been well advertised by Fed Chair Yellen.
Although Trump’s tone towards Asia has begun to simmer down a little, anxiety remains palpable. With more political attention placed on the first hundred days of the new administration, Trump’s quixotic stance adds angst for the region, where Asia’s better growth dynamics can become a scapegoat for the administration’s shortcomings. At this juncture, there is a danger in overstating the threat of a possible trade war, given Trump’s backing of the One China Policy and choosing not to label China as a currency manipulator immediately after taking office. Besides growing evidence that a trade war would cause more domestic harm in the US, it is clear also that Trump lacks a tenable position. Asia is a large buyer of US agricultural goods, a major export item, and an industry that employs a similar number of workers to the automotive sector.