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Top Markets 1Q 14: Investor Favourites Stage A Come Back
April 4, 2014

An exclusive article from iFAST Global Research Desk listing out the best and worst performing global markets for the first quarter of 2014.

Author : iFAST Research

Update Monetary Policy 2013-14

Top Markets 1Q 14: Investor Favourites Stage A Come Back

1Q 2014 saw global equities start off the year slowly, with the MSCI AC World index up 0.3% for the quarter, boosted by returns in the South East Asian favourites of Indonesia (+18.8%) and Thailand (+6.6%), as well as by the likes of key emerging markets such as India (+8.9%). Amongst the various regions, Western developed markets (US +1.0%, Europe +1.4%) continued their outperformance of their Asia ex Japan and emerging market equity counterparts (-1.4% and -1.1%) respectively. Amongst the bottom performing markets were Russia (-15.6%), Japan (-7.9%) and China (-5.8%).

While the focus of 4Q 2013 was on the US Federal Reserve’s decision to begin the reduction of its purchases of US treasuries and mortgage-backed securities, financial markets have taken the continued subsequent further reductions in purchases by the Federal Reserve in its stride. In 1Q 2014, financial markets were temporarily taken aback by events in Ukraine, where Crimea was annexed by Russia, which has lead to sanctions being imposed on Russia by the West, with the threat of more to come should the Russians further their aggression towards Ukraine. Adding to the unexpected situation in Ukraine was the response by Federal Reserve Chairwoman Janet Yellen during her Q&A during her post FOMC statement press conference alluding to a period of “around six months” before interest rates could be hiked after asset purchases were ended, which sent markets back pedalling as consensus had expected interest rates to be held steady at its current levels closer to end 2015 or early 2016.

Other events of note were the debt defaults in China, where the first publicly offered corporate bond default on the mainland since 1995 occurred. Following the historical default of Chaori Solar Energy Science & Technology Co., real estate developer Zhejiang Xingrun expressed that it was unable to repay RMB 3.5 billion worth of loans, unsettling the Chinese equity market as investors fretted over renewed fears of a credit crunch and a slew of economic indicators pointing to sluggish growth on the mainland compounded worries.

In this end-of-quarter update, we take a closer look at the top-performing markets over the past 3 months, (Indonesia, India and Thailand), while the performance of the bottom performing markets of Russia, Japan and China are reviewed.

[All returns in SGD terms unless otherwise stated]

Table 1 - Market Performance (in SGD Terms)



1Q 2014 Returns











S&P / ASX 200






Stoxx 600



S&P 500














Emerging Markets

MSCI Emerging Markets


Asia ex-Japan

MSCI Asia ex-Japan





Hong Kong







Nikkei 225





Source: Bloomberg, iFAST Compilations;

*Returns in SGD terms excluding dividends

Top Performers

Indonesia (+18.8% in SGD terms)
Indonesia was one of the worst performing markets in 2013, as the Jakarta Composite Index (JCI) ended the year -1% lower (in local currency terms) compared to the start that year. The weakened Indonesian Rupiah (IDR) compounded the loss further, with the JCI Index losing -19.2% in SGD terms in 2013.
Since the turn of the year, the JCI Index rebounded and went on a bull run, to finish the first quarter of 2014 with an exceptional 11.7% gain (in local currency terms). The IDR has made a significant rebound in 1Q 2014, gaining 6.3% for the quarter to boost the JCI index’s gain to 18.8% in SGD terms.

Possibly the biggest catalyst for the rise in the market is the hype emanating from rumours that Jakarta’s immensely popular Governor Joko Widodo (Jokowi) could run for President in the July Elections. Despite only helming the Governor post for 17 months, Jokowi’s popularity has skyrocketed. He is well received amongst ordinary citizens due to his humble and caring image, whereas investors are also in favour of his business friendly attitude. The most evident positive reaction from markets was on 14 March 2014. Within one day, the JCI Index rose +3.2% (in local currency terms) upon confirmation that Jokowi had received a mandate from his political party to run in the presidential elections.

Another reason for the strong market run-up was the upgraded earnings estimates. The depreciation of the IDR by -19.5% against the USD in 2H 2013, and -24% over course of 2013 is expected to translate into a boost for Indonesian exporters who sell their products in USD, when converted back into IDR.
From a valuation standpoint, the JCI Index is trading at PE ratios of 15.3X, 13.0X, and 11.6X based on estimated earnings for 2014, 2015, and 2016 respectively, compared to its estimated fair PE ratio of 14.0X (as of 31 March 2014).

While the political catalyst could boost market sentiment further in the short term, and a weakened currency has helped improve earnings forecasts for Indonesian companies (aiding valuations in the mean time), being overly-dependent on currency weakness is not prudent given that the depreciation of the IDR has been already priced into earnings and market sentiment although powerful, is fleeting at best. The above leaves the market susceptible to unexpected strengthening of the IDR which could cause partial reverse of profit expectations, and, a failure to win the presidential elections by Jokowi could see the current market sentiment change abruptly. We maintain our 'Neutral' rating of 2.5 stars for the Indonesian equity market.

India (+8.9% in SGD terms)
India markets as represented by BSE Sensex ended 1Q 2014 as the third best performing market under our coverage The benchmark Index was able to generate 5.74% (in local currency terms) during the quarter. The positive sentiments in the market were on account of the consensus in the market that a stable government would be formed after the elections along with positive macro-economic indicators.

During this quarter, inflation, the biggest concern for the policy makers had shown a decline. This can be seen from that fact that inflation in terms of WPI had declined from 6.4% in December 2013 to 4.68% in February 2014, and has been one of the lowest since June 2013 while the CPI is hovering around 8.10% in February 2014 as against 9.87% in December 2013. The inflation during the quarter had shown a decrease on account of the moderation in food prices. In addition to this there has been a reduction in the current account deficit on account of the restrictions placed on gold and the measures taken by the RBI to increase the foreign flows into India. Along with this, currency fluctuations also seemed to have stabilized during the quarter. The INR which has been in the range of INR 61-62 for some time now has slowly moved to below 60 by the end of March. Finally, the measures taken by the government to reduce fiscal deficit along with the status quo maintained by the Reserve Bank have also added to the positive sentiments in the market.

As per our estimates, the Indian equity market is currently valued as on 31st March 2014 at a PE of14.66X, 12.50X and 11.01X for FY2013-14, FY2014-15 and 2015-16 respectively. We have an “attractive” rating of 3.5 stars for the Indian market

Thailand (8.9% in 1Q 14 in SGD terms)
After incurring a loss of -10.0% last year, the Thai equity market (as represented by the SET Index) rebounded in 2014 and slowly crawled its way up to record a nice gain of +8.9% (in SGD terms) by the end of 1Q 2014, resulting in the country landing near the top of the performance ladder. Heightened volatility was witnessed in the somewhat troubled month of January, when anti-government protests were in full-swing in Bangkok and police and military forces were on standby for any potential escalation of tensions and civil strife. However, since the protests waned in February and with the lifting of the state of emergency, the Thai equity market has rallied as market participants and foreign investors piled back into Baht denominated assets. The Thai Baht reversed its slump against the Singapore Dollar last year, strengthening by approximately 1.5% through 1Q 14, helping to boost returns in Thai equities in SGD terms.

Key leading indicators such as business sentiment and consumer confidence continued to trend downwards over the course of the first quarter of the year. Consumer confidence fell to a reading of 69.9 in February, down from a 71.5 reading in January while Thailand’s capacity utilisation rate continued its gradual decline, falling from 62.1% in January to 59.2% in February. Inflation in Thailand accelerated slightly through 1Q 14, increasing 2.1% year-on-year in March from a 2.0% year-on-year increase in February, remaining within the Bank of Thailand’s (BOT) target range. This has allowed the BOT to remain dovish; and on 12 March, it lowered its benchmark interest rate level by 25 basis points to 2.0% to “lend more support to the economy and ensure continuous financial accommodation.”

Thai companies have finished their earnings reporting season for 4Q 2013, and they have underperformed consensus earnings estimates and expectations as a whole. Given deteriorating economic conditions in the country, it was not surprising that negative earnings surprises have materialised for corporate Thailand as a whole. Earnings estimates for the heavily weighted energy and utilities and banking sectors have been revised downwards by -5% year-to-date, while Thai telecommunication and commerce companies saw their earnings revised downwards by -7% and -6% respectively. Thai commerce companies like CP ALL, with 46% of their stores in Bangkok, had their earnings affected by the unrest in the capital. Overall, earnings estimates for the benchmark SET index on aggregate have been adjusted gradually downwards by approximately -5.0% since the start of the year, and even though the state of emergency has been lifted, political uncertainty still remains as the interim ruling party still contemplates fresh rounds of elections.

Based on market consensus as of 31 March 2014, the SET Index is currently trading at estimated PE ratios of 13.1X and 11.6X for 2014 and 2015 respectively, as compared with our estimated fair PE ratio of 12.5X. While protests have subsided and political uncertainty still remains, we would like to highlight that the market is fairly valued. With estimated earnings growth of 9.0% and 13.2% for 2014 and 2015 respectively, we estimate its upside potential by end-2015 to be around 7.9% and we maintain our current rating at 2.5 stars – “Neutral” for Thailand.

Bottom Performers

China (-5.3% in SGD terms)
In the first quarter of the year, pushing forward the reform agenda took a front seat in China, at a time when the pace of economic growth remains fragile. Plagued by news-flow that has been negative to the market in the short run, China became the third worst performer in the first quarter of 2014, with the Hang Seng Mainland 100 (HSML100) index retreating -5.3% (in SGD terms).

Although the government maintains its growth target of 7.5% for 2014, the reality of an economic slowdown has become evident. Key economic indicators such as fixed asset investments, retail sales and industrial production all disappointed in February 2014 and the official manufacturing purchasing managers’ index (PMI) has fallen close to the 50-point threshold which divides expansion from contraction in the industry. These figures have exacerbated concerns that China will lose its growth momentum. At the same time, the government has been keen to push forward its reform plans; with its goal to rein in excessive credit, large-scale fiscal stimulus or accommodative monetary policy may not be supportive of economic growth going forward. This has led to renewed concerns of tightened liquidity at the start of the year. Furthermore, ongoing efforts to internationalise the Renminbi led to large swings in the first quarter, with the RMB ending down -2.62% against the USD, which is significant considering its historical movement.

China continues to face headwinds, which partly explains the market’s recent weak performance and may also continue to keep investors cautious. Tight liquidity conditions may persist in China; the central bank has systematically withdrawn liquidity from the system in the first quarter and expressed that rates will remain high, in order to crowd out excessive credit. Moreover, a move from financial repression to liberalisation will also lead to higher interest rates over the long term. At the same time, the government allowed the first corporate bond to default in China, in order to get rid of the unrealistic “implicit guarantee” impression investors had had on practically all investment products. In the short run, this may make investors nervous, but will be beneficial for proper pricing of financial markets in the long term. Plus, we believe that the reform agenda will be beneficial to certain sectors in China, such as ones related to consumption.

As valuations remain extremely attractive and we see reform plans to be positive for the market in the long term, we maintain our favourable view on China. We think headwinds will continue to affect certain sectors in the economy in the short term, especially “old economy” sectors, such as infrastructure and banking. Reform plans may continue to push divergence in the performance of different sectors and hence stock selection has become paramount to investing in this market. As of 31 March 14, the estimated PE for HSML100 index is at 8.5X and 7.7X for 2013 and 2014 respectively, significantly below its fair PE of 13X. We continue to maintain a 5.0-star “Very Attractive” rating for the Chinese equity market.

Japan (-7.9% in SGD terms)
After a strong rally in 2013, Japanese equities, as represented by Nikkei 225 Index, has been one of the weaker performers so far this year, plunging -7.9% (in SGD terms) in 1Q 2014. The weak performance in 1Q 14 was mainly attributable to the yen appreciation, slower growth in US and China and concerns on the fiscal consolidation (consumption tax hike).

The Japanese yen appreciated 2.0% against the dollar in 1Q 14, becoming one of the best performing Asian currencies for the quarter. The currency appreciation casted a cloud over Japan’s exports prospects, particularly given that over 37% of Nikkei 225 Index constituents (around 47% of total market capitalization) derive more than 50% of their sales from overseas, the yen’s strength has negatively affected the earnings estimates of the exporters. In addition, Japan’s exports growth slowed for the third consecutive month in February 2014, due to the slowdown in US and China’s economy. Investors were also concerned that the tax hike will further dampen sluggish domestic demand and detract from the recovery momentum of the economy. Consumer confidence fell to the lowest level since September 2011 in February 2014, indicating that people are turning pessimistic ahead of the consumption tax hike in April, as the modest wage hikes at some large Japanese firms might not be strong enough to boost the economy. As a result, the Japanese stock market has underperformed in the quarter.

Despite the market’s unexpected weakness in 1Q 14, the fundamental earnings outlook has largely remained unchanged. Exporters are still cautious on the currency movement, with their earnings projections for FY 2014 remaining conservative. For example, Toyota projects its earnings for FY 2015 based on a 95 yen per dollar assumption, meaning a potential earnings upgrade if yen stays at the current level or depreciates further. We believe exporters, the main beneficiaries of a weakening yen, continue to be the major contributor to growth. Moreover, we don’t believe a consumption tax hike will have a huge adverse impact on the economy in near term, given that the Japanese government will implement an economic stimulus package of 5 trillion yen (equivalent to 1% of GDP) in order to soften the impact of the tax hike.

As at 31 March 2014, earnings of the Japanese equities are expected to increase by 37.0% in FY 2014, 16.0% in FY 2015 and 11.3% in FY 2016. Estimated PE of Nikkei 225 Index (covering the blue chips stocks) is at 19.2X for FY 2014 and 16.6X for FY 2015. Estimated PE of the broader TOPIX Index (covering all companies listed in TSE first section) is at 14.4X for FY 2014 and 13.3X for FY 2015, highlighting an investment opportunity in the market especially for funds investing in smaller companies. We continue to maintain a 2.5-star “Neutral” rating for the Japanese equity market.

Russia (-15.6% in SGD terms)
Russia, represented by RTSI$ Index ended 1Q 2014 as the worst performing market under our coverage, recording a loss of -15.6% (in SGD terms) during the quarter.  The poor performance was mainly caused by the geopolitical tension between Russia and Ukraine, with the fear of outbreak of war and economic sanctions imposed on Russia accelerating capital flight due to the loss of investors’ confidence in the market. In particular, on 3 March 2014, the Russian equity market suffered a massive single day drop of -12.01%. In terms of currency, the Russian Rouble had depreciated 6.15% against the USD in the first quarter of this year.

Despite the improvement of domestic consumption data released in March, the Russian equity market continued to underperform due to weakened confidence on possible economic sanctions on Russia. Industrial production in February grew 2.1% year-on-year, hitting a high 4-month high; retail sales in February rose by 4.1% year-on year, a 3-month high; real monthly wages in February grew 6.0% year-on-year, the fastest pace in 3 months. However, not all economic data released was positive, with the manufacturing PMI in March recording a 48.9 print, below the 50-mark for the 6th consecutive month while exports in January decreased from USD 49.2 billion to USD 39.46 billion.  It is expected that export growth will be uncertain due to possible trade restrictions from sanctions and the volatile currency movements in the future.

On 3 March 2014, the Russian Rouble depreciated over 2% against the USD on a single day. Bank of Rossii, the Central Bank of Russia, had to raise the key rate by 150 basis points in an emergency attempt to stem capital outflows and stabilise the home currency. With inflation still stubborn and economic growth uncertain, tighter monetary policy may in fact do more harm to the Russian economy than its intended benefit via a potential slowdown in private consumption and fixed investment, hurting economic growth. In mid-March, S&P and Fitch Ratings downgraded Russia’s economic growth forecast in 2014 from 2.2% to 1.2%.

At current levels, the RTSI$ Index is trading at 5.07X and 5.0X 2014’s and 2015’s earnings respectively, with annualised upside potential of 16% for the Russian equity market by end 2015. The Russian market is highly susceptible to any economic sanctions on the financial and energy sectors while earnings downgrades are also likely for companies in the related sectors, which investors should take note of. The impact of rising key rates for stabilising the Russian Rouble should be seen later on in 2014. While negative news haunts the Russian equity market in recent times, we believe that Russia is now very attractive to investors with an investment horizon of 3 years or more. We hold a 4.0 – star “Very Attractive” rating for Russia.

We continue to maintain a favourable view on equities vis-à-vis fixed income as equity valuations continue to remain attractive for most of the markets under our coverage, particularly the higher rated Asia ex Japan and emerging market equity markets (as indicated by the higher ratings on various underlying single country markets) where potential returns are higher for investors who have patience and the requisite risk appetite to stomach potential volatility.

By iFAST Research

Disclaimer: iFAST and/or its content and research team’s licensed representatives may own or have positions in the mutual funds of any of the Asset Management Company mentioned or referred to in the article, and may from time to time add or dispose of, or be materially interested in any such. This article is not to be construed as an offer or solicitation for the subscription, purchase or sale of any mutual fund. No investment decision should be taken without first viewing a mutual fund's scheme information document including statement of additional information. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Investors should seek for professional investment, tax, and legal advice before making an investment or any other decision. Past performance and any forecast is not necessarily indicative of the future or likely performance of the mutual fund. The value of mutual funds and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. Please read our disclaimer on the website.Please read our disclaimer in the website.

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