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Top Markets 1H 14: Most Markets Higher
July 9, 2014

As we move into 2H 2014, we take a closer look at some of the top-performing markets for the first half of the year (India, Indonesia and Thailand) as well as those on the other side of the fence (Russia and Japan) to identify some of the key reasons for their either stellar or disappointing performance as well as our outlook for each market.

Author : iFAST Research Team

 Fund Managers on Short-Term Funds

Global equity markets came to life in the second quarter of 2014 after a rather muted performance in the first quarter, with the MSCI AC World index posting a gain of 3.4% in 2Q 14. Most equity markets around the world actually recorded positive returns, with emerging markets starting to witness a return of capital, helping to boost the region’s performance. The MSCI Emerging Markets index recorded a gain of 4.7% in 2Q 14, while the MSCI Asia ex Japan index recorded a gain of 5.3%, with investors’ sentiment starting to improve as compared to the rather pessimistic consensus sentiment on the region last year. While the Japanese equity market (as represented by the Nikkei 225 index) had a disappointing performance in the first quarter, the market rebounded, and managed to post a gain of 3.1% in 2Q 14.

While the US Federal Reserve continued its scaling back of its monthly stimulus programme, equity markets of developed economies (particularly the US equity market) greeted the ongoing Fed tapering with much optimism. The US equity market (as represented by the S&P 500 index) continue to advance on investors' optimism on accelerating economic momentum in the US, with the index gaining 3.7% in 2Q 14 – the US equity market currently trades at 16.7 times estimated earnings (as of 1 July 2014), making US equities fairly valued at this juncture. While the talk of hikes in the benchmark Federal Funds rate sometime in the foreseeable future still grips financial markets, news of the European Central Bank's (ECB) latest actions for monetary policy across the Atlantic stole the show and dominated financial news in the second quarter. With the ECB reducing its main refinancing rate by -10 basis points to a new historic low of 0.15% on fears of disinflation, slow credit growth and sluggish economic growth in the Eurozone, financial markets celebrated the ECB's decision.

Russia and India were the top performing markets under our coverage for the quarter, with the Russian equity market (represented by the RTSI$ index) surging by 10.0% and the Indian equity market (represented by the Sensex index) rallying by 12.2% over the period. While much attention was focused on the Crimean situation and the response of Western nations on Russia's actions in that region, the Russian equity market has strongly rebounded since the day Russian President Putin dispatched troops to annex Crimea in Ukraine. On the other hand, Indian equities soared on positive sentiment on political developments, as the leader of the Bharatiya Janata Party (BJP), Narendra Modi, triumphed in recent elections and was sworn in as the fifteenth prime minister of India. While it is too early to see the fruits from efforts by Modi's new government, investors have remained optimistic on expectations that the new government will roll out many infrastructure projects that have been delayed, and as well as implement business-friendly reforms for the private sector that could potentially drive economic growth for India.

The Thai equity market continued to its 1Q 14 positive showing and posted a 6.9% gain in the second quarter, with the Thai junta now in control and pushing for a return to normalcy for the Southeast Asian kingdom. The Taiwanese equity market was the top performing East Asian equity market, recording a gain of 7.2% in 2Q 14, while South Korean and Hong Kong equities posted gains of 4.9% and 3.8% respectively over the period. The Chinese equity market (as represented by the HSML100 index) gained 3.0% for the quarter. Indonesia did not perform as well as it did in 1Q 14, with its benchmark JCI index incurring a loss of -2.6% in the second quarter, but it still made it near the top of the performance ladder for 1H 14.

As we move into 2H 2014, we take a closer look at some of the top-performing markets for the first half of the year (India, Indonesia and Thailand) as well as those on the other side of the fence (Russia and Japan) to identify some of the key reasons for their either stellar or disappointing performance as well as our outlook for each market.

[All returns in SGD terms unless otherwise stated as of 1 July 2014]

Table 1 - Market Performance (in SGD terms)

Market Index 2Q 14 Return 1H 2014 Returns
India BSE SENSEX 12.20% 22.10%
Indonesia JCI -2.60% 15.80%
Thailand SET 6.90% 14.00%
Brazil Bovespa 6.80% 8.50%
Taiwan TWSE 7.20% 7.50%
Australia S&P / ASX 200 0.70% 5.10%
USA S&P 500 3.70% 4.80%
Asia ex-Japan MSCI AC Asia ex-Japan 5.30% 3.80%
Global MSCI AC World 3.40% 3.70%
Emerging Markets MSCI Emerging Markets 4.70% 3.50%
Singapore FTSE STI 2.10% 2.80%
Korea KOSPI  4.90% 2.20%
Europe (Stoxx 600) Stoxx 600 0.70% 2.10%
Malaysia FBMKLCI 2.40% 1.80%
Hong Kong HSI  3.80% -1.70%
China HSML 100 3.00% -3.00%
Japan Nikkei 225 3.10% -5.00%
Russia RTSI$  10.40% -6.80%

Source: Bloomberg, iFAST Compilations; returns in SGD terms excluding dividends, as of end June 2014

Top Performing Markets

India (+22.1% in SGD Terms)

The Indian equity market (as represented by the S&P BSE Sensex index) is the top performing market under our coverage during the first half of 2014. In local currency terms, the benchmark index was able to generate returns to the tune of 20.04% during this time period. The biggest trigger for this record performance was the outcome of the elections which gave a clear mandate to a single party after a gap of 30 years.

Since September 2013, when Narendra Modi was announced as the Prime Ministerial candidate of the BJP, market participants had caught the Modi fever and adding to these positive vibes was the BJP's victory in 3 out of 5 states in the Assembly elections held in December 2013. Finally, the market went on a roll after the exit polls predicted that Narendra Modi would become the next Prime Minister of India and unlike exit polls in the previous elections, this one turned into reality. There has been no looking back for the markets since then. The previous government's inaction on the policy front was one of the major reasons for it to be ousted from power. Hence, a clear mandate to the BJP meant that they would be able to implement policy reforms without being bothered by the pressures from coalition partners.

The Modi government would work on the mandate of "Minimum Government, Maximum Governance". During the initial days of coming to power, Modi came out with a ten point agenda to improve governance and the top most priority was given to the empowerment of bureaucracy which in turn would have a positive impact on speedy implementation of reforms. In the President's address to the Parliament which laid out the roadmap of the government, it was clearly mentioned that the government's key priority would be putting the economy back on track. India's infrastructure, which is a key contributor for economic development, will also be given utmost importance by this government. The fact that this government is serious about infrastructure development is clear from the statement made in the President's address which was on these lines: "Lack of robust infrastructure is one of India's major impediments. The government will chalk out an ambitious infrastructure development programme to be implemented in the next 10 years. A fast-track, investment friendly and predictable PPP mechanism will be put in place". In addition to this, the government has taken measures to control inflation like cracking down on hoarders, fixing minimum export price for onions and potatoes, delisting fruits and vegetables from the Agriculture Produce Marketing Committee (APMC), etc. PM Modi has also told the nation that he would have to take certain tough measures so as to put the economy back on the growth trajectory. In line with this, the railway fares and freight charges have been increased and we are on the wait and watch mode to see the other measures which will be taken by the government in the coming weeks. The market has also taken very well to the fact that the government is taking measures to control inflation which will supplement RBI's efforts in taming it.

According to consensus estimates, as of 1 July 2014, the estimated PE for India’s stock market (Sensex) is 16.5X, 14.0X and 11.9X for FY2014-15, FY2015-16 and FY2016-17 respectively. Estimated earnings growth is 10.7%, 17.4% and 17.4% for FY2014-15, FY2015-16 and FY2016-17 respectively. We maintain an “Attractive” rating of 3.5 stars for India.

Indonesia (+15.8% in SGD Terms)

The Indonesian market was one of the best performers in 1H 2014. The gain was mainly contributed by the Bull Run during the first quarter of 2014 with an exceptional 11.7% gain (in local currency terms) and 18.8% in SGD terms due to the IDR rebounding by 6.3% against the SGD. However, the Bull Run petered out in 2Q 2014 gaining only 3.7% (in local currency terms), while the Indonesian Rupiah slid -4.7% against the SGD. Overall, the Indonesian market ended the first half of 2014 with a 15.9% gain (in local currency terms) and 15.8% in SGD terms.

Possibly the biggest catalyst for the Bull Run 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 favor 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 IDR depreciated -19.5% against the USD in 2H 2013 and -24% over course of 2013. For Indonesian exporters who sell their products in USD terms, a weakened IDR may translate into a boost in earnings. During 1H 2014, earnings estimates for 2014 have been downgraded by -2.8% whereas the 2015 and 2016 estimates have been upgraded by 0.9% and 8.3% respectively.

From a valuation standpoint, the JCI Index is trading at PE ratios of 15.5X, 13.1X, and 11.5X based on estimated earnings for 2014, 2015, and 2016 respectively, compared to its estimated fair PE ratio of 14.0X (as of 30 June 2014).

On one hand, the political catalyst could boost the Bull Run further in the short term. On the other hand, the weakened currency has helped improve earnings forecasts for Indonesian companies, while aiding valuations, but being overly-dependent on currency weakness is not prudent. We think that the depreciation of the IDR has been priced into earnings already, hence the strong upward-revisions of late. However, this leaves markets susceptible to strengthening of the IDR, should that occur unexpectedly, could cause a reverse of profit expectations. We maintain our 'Neutral' rating of 2.5 stars for the Indonesian equity market.

Thailand (+14.0% in SGD Terms)

While the world watched as civil strife and the colourful protests in the streets of Bangkok were disbanded following the wake of the coup d'état by the Thai military, Thai equities have continued to "climb a wall of worry," rallying by 6.9% in 2Q 14 alone and posting a nice 14.0% gain (in SGD terms) in the first half of 2014. Ever since taking control of the government, the Thai junta has made payments that were due to hundreds of thousands of rice farmers, cut diesel prices and sped up budget spending to boost expansion, as well as pressed for a renewal of stalled infrastructure development plans. The cooling of civil tensions in the capital following the junta's takeover has led to a slight boost in domestic confidence, with sentiment indicators like the consumer confidence index increasing to a reading of 70.7 in May, up from a reading of 67.8 in April. The consumer economic confidence index also rebounded, registering a reading of 60.7 in May and up from a prior reading of 57.7. The increases in May's data broke a thirteen-month long trend of weakening consumer confidence that started in April last year, and this could lead to a potential rebound in domestic spending following months of cautious spending by Thai households.

In 1Q 14, the Thai economy contracted by -0.6% on a year-on-year basis and by -2.1% on a quarter-on-quarter basis. With weaker-than-expected GDP growth for the first quarter, consensus economic forecasts for the Thai economy for 2014 and 2015 have started to see downward revisions. Consensus 2014 GDP growth forecasts for the kingdom have been revised from an initial 4.0% at the start of the year to 3.0% at the end of the first quarter and to 1.6% in June, while the Bank of Thailand (BOT) have reduced its own 2014 GDP forecasts to 2.7%. Going forward, an increase in exports growth due to accelerating global economic momentum and a pickup in investments which were previously held back due to the recent civil unrest in the Thai capital could contribute positively to GDP growth in subsequent quarters.

Given the downgrades made to GDP growth forecasts, earnings estimates for corporate Thailand have also been revised downwards, with 2014's earnings revised lower by -9.8% year-to-date (as of 1 July 2014), and by -2.7% from 1Q 14. The Thai energy sector, being highly correlated with the country's GDP growth, has seen its earnings revised lower by -9.8% year-to-date given consensus downgrades to 2014's GDP growth – with energy titan and sector heavyweight PTT's EPS estimate reduced by -11.3% year-to-date. Long awaited energy reforms due to a lack of political clarity or an absence of a formal government decision-making process has weighed on the sector's earnings. Thai information and communication technology companies however, saw their earnings estimates starting to stabilise from May since the military coup, but are still down year-to-date (-6.2% for 2014 and -6.1% for 2015) – with sell-side analysts still concerned about near-term regulatory risks like delays in spectrum auctions (due to the junta's takeover) that could weigh on earnings of the sector. Consumer staples companies like Thai retailers have also started to see their earnings estimates stabilise following the military coup; companies like CPALL and Big C Supercenter have seen downward revisions in their EPS by -7.7% and -5.2% year-to-date.

Based on market consensus forecasts as of 1 July 2014, the SET index is currently trading at estimated PE ratios of 14.6X, 12.7X and 11.5X for 2014, 2015 and 2016 respectively, as compared with our estimated fair PE ratio of 12.5X. Valuations have continued to rise throughout the second quarter of 2014 (including after the military takeover), and the current situation of a higher equity market coupled with lowered earnings growth forecast does not justify an upgrading of the market’s star rating. With estimated earnings growth of 5.4% and 14.9% for 2014 and 2015 respectively, the Thai equity market’s upside potential is one of the lowest among the markets under our coverage, and thus we maintain a 2.5 stars “Neutral” rating for Thailand.

Bottom Performers

Russia (-6.8% in SGD Terms)

As of end June 2014, the Russian equity market, represented by RTSI$ Index, made a loss of -6.8% (in SGD terms), resulting in the country being the worst performing market under our coverage. However, since the index is measured in USD terms, the loss was partly caused by a 3.68% depreciation of Rouble against the USD during the same period.

The Russian equity market (as represented by RTSI$ index) had shown a rebound in 2Q 2014 after decreasing by -15.6% in SGD terms in 1Q 14 to a -6.8% decline in SGD terms in 1H 2014. RTSI$ index rallied 12.78% in USD terms in May 2014 while Russia recorded a net inflow of funds (USD 151 million) in the same month according to EFPR data. Fund flows in 2Q 2014 have stabilised and have recorded a net outflow of USD 10 million in 2Q 2014, compared to a net outflow of USD 279 million in 1Q 2014, despite the strong inflow in May 2014.

Going forward, the Russian economy may enter a technical recession (defined as GDP contraction for two consecutive quarters). The economy still faces severe challenges from slower growth momentum in retail sales, a high interest rate environment and the continued weakness in investments. Facing sluggish economic prospects, the market anticipates more government policies to stimulate the economy, such as the proposal of light oil products' export duty reduction in 2015 and 2016. We anticipate the performance of the Russian market to be influenced by political and government policies while the Russia-Ukraine dispute remained unresolved.

In terms of valuation, the estimated PE for RTSI$ Index stood at 5.7X, 5.6X and 5.3X for 2014, 2015 and 2016 respectively, with the potential upside of 19.5% with dividends inclusive by end-2015. Market valuations are still attractive compared to its fair PE of 6.5X. The Russian equity 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. Although negative news haunts the Russian equity market in recent times, we believe that Russia is very attractive to investors with an investment horizon of 3 years or more. We hold a 4.0 – star “Very Attractive” rating for Russia.

Japan (-5.0% in SGD Terms)

Japanese equities, as represented by Nikkei 225 Index, have been one of the weaker performers in the first half of this year, plunging -6.93% (in local currency terms) during the period. The market once fell by -14.6% to the year-to-date low as of 14 April 2014 but rebounded subsequently. The weak performance in the first half of 2014 was mainly attributable to the lack of action from Bank of Japan (BOJ), concerns on the consumption tax hike and conservative earnings guidance set by the Japanese companies.

Markets generally expected the BOJ would implement additional monetary stimulus particularly ahead of the consumption tax hike as they do not believe the government's inflation target of 2% can be achieved unless the central bank takes further steps. In addition, it is believed that more easing would further weaken the yen, which helps to boost the country's exports and corporate earnings. However, expectation has been missed. Given that the CPI accelerated in May for the twelfth consecutive month, the BOJ has room to delay its easing plan. Markets also widely expected a sharp pullback in economic growth in the coming quarter, due to the spending spree before the consumption tax hike from 5% to 8% on 1 April 2014. Because of the expectation of slower economic growth and the stronger-than-anticipated FY 2014 (ended March 2014) results, company guidance for FY 2015 was quite conservative. Recurring profit growth guidance was at just 0.7% for the Topix first section companies, an apparent shortfall compared with the market consensus of a 6.7% growth. Earnings growth for FY 2015 has also been revised downward in the second quarter. These factors were negative to the market sentiment and dragged down the market performance in the first half.

However, earnings revisions have been stabilising recently. Also, most exporters' USD/JPY assumption remains on the 100 yen/US$ level, meaning that a potential earnings upgrade is possible if yen stays at the current level or depreciates further. Given that the Japanese government will implement an economic stimulus package of JPY 5.5 trillion (equivalent to about 1% of 2013's total GDP) in order to offset the negative impact of the tax hike on GDP, the overall impact on economic growth and earnings estimates would probably not be significant.

As at 30 June 2014, estimated PE of Nikkei 225 Index (covering the blue chip stocks) is at 17.2X for FY 2015 and 15.3X for FY 2016. Estimated PE of the broader TOPIX Index (covering all companies listed in TSE first section) is at 14.2 X for FY 2015 and 12.7X for FY 2016, highlighting an investment opportunity in the market especially for funds investing in smaller companies. We continue to maintain a 2.5-stars Neutral rating for the Japanese equity market.

Moving Forward

While global equity markets had a fairly good second quarter (which has helped to bolster performance from the first quarter), certain equity markets have had strong run-ups and expansions in their valuation multiples. Subsequently, we have recently lowered our star ratings on the US and European equity markets, as well as on the global technology sector due to a decline in expected future returns from those markets.

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.

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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