|China A||CSI300 Index||8.50%|
|World||MSCI AC World||3.30%|
|Asia ex-Japan||MSCI Asia ex-Japan||-5.30%|
|Emerging Markets||MSCI Emerging Markets||-10.90%|
|Source: Bloomberg, iFAST Compilations|
|Returns in SGD terms excluding dividends, as of end December 2015|
2015 started the year on a bright note, with financial markets licking their lips at the prospects of the recently announced asset purchase programme by the European Central Bank (ECB). However, following a strong start which saw on-shore Chinese equities (as represented by the CSI 300 index) surge 51.5%, markets were rocked by a meltdown in the Chinese equity market which saw on-shore Chinese equities plunge by –43.5% from a peak-to-trough basis in just two months! Other markets were not left unscarred as even the US and European equity markets experienced declines of -12.3% and -18.1% that erased prior gains of 3.4% and 20.9% respectively, with other equity markets around the globe likewise enduring a summer swoon.
Lurking around every Federal Reserve monetary policy meeting throughout 2015 was the prospect of the first US Federal Reserve rate hike since 2006, with uncertainty over the path of interest rate hikes in the US plaguing investor sentiment. The US Federal Reserve finally hiked interest rates in 2015 at its December policy meeting by 25 basis points. While the Fed has begun to normalise monetary policy, in Europe, the ECB has continued to ease monetary policy, with its extension of its asset purchase programme well into 2017 whilst sending its deposit rate further into negative territory. The divergence between the monetary policies of the two regions has been a popular theme over the course of the year.
Throughout 2015, economic momentum had been soft in Europe, the US as well as China, with economic growth remaining positive albeit muted in Europe and as China continued to rebalance its economy towards one focused on domestic consumption. The persistent decline in commodity prices (in particular, WTI crude oil, which has plunged -41.6%) saw deflationary concerns arising thanks to negative headline inflation readings, and impacting the global energy sector.
The "political effect" continued to make its presence felt in 2015, albeit impacting negatively. Brazil bore the brunt of negative politics, with a widening corruption scandal and a President that has had impeachment proceedings initiated against her contributing to a -28.5% decline in the Brazilian Real currency against the SGD. Closer to home, neighbours to the North and South of Singapore also saw politics impact the performance of equity markets, with allegations pertaining to 1MDB and a dissipation of the "Jokowi effect" detracting from the performance of the Malaysian and Indonesia markets for the year as they both lost -15.6% last year.
While our Key Investment Themes and 2016 Outlook covers our expectations for the year ahead, in this end-of-quarter update, we take a closer look into the top and bottom 3 performing markets under our coverage over the course of 2015.
[All returns in SGD terms unless otherwise stated as of 31 Dectember 2015]
Top Performing Markets
Japan (+8.1% in 4Q 15, +15.8 for 2015 in SGD terms)
Represented by the Nikkei 225 index, Japanese equities have been on the top three market list throughout all four quarters this year, and as the year ends, has also taken the crown of best performing market in 2015; the Nikkei 225 index rose 8.1% in 4Q 2015 and has risen by 15.8% through the year.
The Japanese equity market's performance was marked by two periods of strength. 1H 2015 saw markets speculating on the possibility that the Bank of Japan (BOJ) might expand its asset purchase programme due to the climbing risk of deflation and stagnant corporate investment, with enthusiasm further fuelled by a significant surge in corporate earnings, driving the Nikkei 225 index upwards by 17.8% (in JPY terms) in 5 months. Following the summer swoon that afflicted most markets, the Japanese equity market rebounded almost twice as much as the MSCI AC World index, as it surged by 11.4%. The strong rebound came on the back of strong tourism growth as tourists' spending in Japan reached a new high of JPY 1 trillion in 3Q 2015, 80% higher compared with the figure a year ago and was viewed as likely to provide support for economic growth.
On the economic front, the sluggish 3Q 2015 GDP figure was mainly due to a slump in inventory levels. Japan's 3Q 2015 private inventory component reduced GDP growth by 0.2 percentage points. However, it is important to know that a reduction in inventories in 3Q 2015 is not necessarily a bad sign, as it mainly reflects a robust demand for products and services arising from strong private consumption. If private consumption remains strong moving forward, businesses will naturally replenish inventory in order to meet demand. This tends to lift GDP growth higher moving forward.
The pressure on the BOJ to increase stimulus remains high, with oil prices likely to stay low at least in 1H 2016, inflation in Japan is unlikely to gravitate to the government's 2% target. In addition, corporate capital investment is also not growing as fast as the government expects them to be, making another round of new stimulus highly possible in 2016.
As of 30 December 2015, earnings of Japanese equities are expected to increase by 11.23% in 2016 and 9.17% in 2017. The Nikkei 225 index trades at estimated PE ratios of 16.7X and 15.3X based on 2016 and 2017 earnings estimates respectively, as compared to its fair PE ratio of 20.0X, warranting a star rating of 3.5 Stars "Attractive" for Japanese equities at this juncture.
China A (+14.1% in 4Q 15, +8.5% for 2015 in SGD terms)
The China A-share market, as represented by the CSI 300 Index, gained 14.1% in SGD terms over 4Q 2015 to end the year as one of the top performing markets under our coverage, with total returns for 2015 coming in at 8.5%. Similar to the previous year, the China A-share market has caught the attention of the investment community and the media worldwide, but the talking point this time was on its extreme volatility, as the market underwent a strong rally that began in late 4Q 2014 before suffering a massive sell-off. Despite heavy intervention by the government, the CSI 300 Index is still down by -29.4% (in SGD terms as of 31 December 2015) from its peak in mid-June. In terms of sectors, the information technology, healthcare and telecommunication services sectors were the top three performing sectors in 2015, delivering returns of over 30% during the course of the year as they were supported by various government policies and initiatives.
On the economic front, China's economic growth continued to decelerate, from 7.3% in 2014 to an average of 6.9% year-on-year over the period between 1Q 2015 to 3Q 2015. Targeting a GDP growth rate of 6.5% in 2016, the government is seeking to strike a balance between achieving its growth target and the pushing forward of structural reforms. Structural issues such as overcapacity and debt overhang, however, will continue to pose headwinds to China's economic growth. The People's Bank of China (PBOC) has already slashed its benchmark interest rate six times since November 2014, with the 1-year deposit rate falling to 1.5% from the 3% seen at the beginning of the current easing cycle. With China's economy still under downward pressure, we expect both fiscal and monetary policies to remain accommodative in 2016.
In a widely expected move, the RMB was included in IMF's Special Drawing Rights (SDR) basket in 2015, with an initial weighting of 10.92%. While the inclusion is not expected to bring about any meaningful benefits in the short term, it was an important milestone in the internationalisation of the RMB. Following its sharp depreciation in August, mounting concerns over the strength of the RMB have triggered large capital outflows from China. Compared to the currencies of other emerging Asian countries, however, the volatility of the RMB has been relatively lower. Given the expectation that the USD will further strengthen against other global currencies, we anticipate that the RMB could likewise see weakness against the USD in 2016. With the market currently trading at an 11.7% discount to its fair PE ratio, we retain our 3.5 Stars "Attractive" rating for the China A-share market.
US (+7.3% in 4Q 15, +7.6% for 2015 in SGD terms)
In 4Q 2015, the US equity market (represented by the S&P 500 Index) posted a 7.3% gain in SGD terms, making 2015's return a 7.6% gain. However, in local currency terms, the US equity market marked its first year since 2008 with losses, losing -0.7% in price terms although dividends managed to pushed total returns to 0.9% for the year. This marked the first time since 2011 that the S&P 500 Index ended up less than 1.0% for a full year. In 4Q 2015, information technology and healthcare companies were the top performers on aggregate, while companies from the energy and utilities sectors continued to underperform. Companies like Amazon, NVIDIA and Alphabet saw their stock prices rally strongly in 3Q 2015 to become some of 2015's best performing stocks, posting gains of 123.6%, 66.5% and 44.5% respectively last year. Mining giant Freeport-McMoran saw its share price decline more than -70.0% in 2015 as prices of base metals continued to fall, while energy-related companies like Kinder Morgan and Chesapeake Energy were also some of the bottom performing stocks last year.
Estimated earnings of US companies on aggregate were partially revised downwards over 4Q 2015, with 2015's earnings lowered by -0.07%, while 2016's and 2017's estimated earnings were lowered -1.46% and -1.38% respectively quarter-to-date (as of 31 December 2015). On a sector basis, the information technology, healthcare as well as telecommunication services sectors saw minor upgrades to their aggregate earnings, while the industrials, consumer staples and utilities sectors saw downgrades to their estimated earnings. The energy sector continued to bear the brunt of sliding energy prices, with 2016's and 2017's estimated earnings lowered -15.0% and -7.0% respectively over the quarter.
In terms of economic data, the US economy continued to add jobs in 4Q 2015, with recent data also showing that overall labour market conditions have improved. The US housing market as a whole has also continued to advance alongside the labour market. On the other hand, business sentiment has partially declined in 4Q 2015, with US manufacturing relatively muted – whether it would be a blip in the overall trend remains to be seen. Consumer confidence held up in the fourth quarter, with domestic consumption contributing to economic momentum, and should continue to be a driver for GDP in 2016. The Federal Reserve finally pulled the trigger last month, raising the benchmark Federal Funds rate by 25 basis points to the current target bound of 0.25% - 0.50%. Citing improving economic conditions and confidence in the US economy, the Fed has embarked on its long-awaited interest rate normalisation. The central bank's policy tightening stance is widely expected to be gradual as policymakers continue to measure subsequent hikes against both economic progress in the US as well as the global economic environment. Inflationary pressures still remain relatively benign at this current juncture, offering the Fed leeway to adopt a deliberate and prudent approach.
As of 31 December 2015, the S&P 500 Index trades at estimated PE ratios of 16.0X and 14.2X for 2016 and 2017 respectively as compared to its fair PE ratio of 15.0X. Since we lowered our star ratings from 2.5 stars "Neutral" to 2.0 stars "Unattractive", the US equity market has declined in 3Q 15 and rebounded into the year-end. Valuations remain at a premium at this point of time, with contraction of multiples expected to detract from overall performance going forward. We recommend investors to underweight their portfolios' exposure to US equities, and consider adopting defensive measures, such as the equity long short strategy. We maintain a 2.0 stars "Unattractive" rating for the US equity market.
Bottom Performing Markets
Indonesia (+14.2% in 4Q 15, -15.6% for 2015 in SGD terms)
Indonesian equities rebounded in 4Q 2015, with the JCI Index rising sharply by 14.2%. A considerable part of the positive return was contributed by a strengthening rupiah (an appreciation of 5.09% against the SGD) as the Indonesian central bank employed active currency intervention during the last quarter of the year. Nevertheless, the positive performance in 4Q 2015 was insufficient to offset hefty losses in earlier parts of 2015, which saw the JCI Index eventually incurring a -15.6% loss for 2015.
Indonesia's economy expanded 4.73% year-on-year in 3Q 2015 on the back of stronger government spending and technical support from a hefty decline in imports-same factors that supported 2Q 2015 GDP growth. The 3Q GDP growth number was slightly higher than the prior 4.67% year-on-year growth, but lower than a 4.80% year-on-year expansion forecasted by analysts. Government spending has improved significantly from a 2.28% year-on-year growth in 2Q 2015 to 6.56% year-on-year growth in 3Q 2015 as government spurred growth through more infrastructure development projects. Investment activities have also been stimulated in tandem, with the component growing at a faster pace of 4.62% year-on-year compared with a 3.55% year-on-year growth recorded in 2Q 2015. A tamer inflation reading has helped to keep private consumption growth close to 5% pace for the quarter. On the external front, sluggish exports arising from weak external demand and low commodity prices continued to be a drag on GDP growth, with this GDP component shrinking by -0.69% year-on-year over the quarter.
Apart from currency intervention, the Indonesian central bank has adopted a "wait and hold" approach in terms of its interest rate policy in the last quarter of the year, as it continues to assess and monitor the impact of the latest stimulus announced by the government and the impact of a Fed rate hike on the domestic economy. With the CPI moderating and the IDR stabilising, the central bank has found some room to potentially ease monetary policy in the upcoming quarters.
Companies' reported earnings continued to disappoint in 3Q 2015 as they posted a negative earnings surprise of -14.49% on aggregate. The negative earnings surprise was broad-based, with the utilities sector registering the largest negative earnings surprise of -45.00% followed by a -28.16% negative earnings surprise in the materials sector. Earnings disappointments have led to a further slash in 2015 earnings by -7.5% over the quarter, reflecting a pessimistic earnings outlook for 2015. Nonetheless, a low earning base from 2015 and a slightly brighter near term economic recovery should be supportive for earnings growth moving forward, which sees consensus forecast a 14.9% growth rate in 2016.
Moving forward, fiscal stimulus will play the major role in supporting investment activities and job creation moving forward, with an acceleration in project approvals and launches supporting GDP growth in the upcoming quarters. Possible monetary easing going forward could also be a plus factor for boosting the economy, although the central bank might be extra cautious on taking this path given its potential negative impact on the IDR. While the Indonesian economy may take a turn for the better in the upcoming quarters, stretched valuations remain a major concern as a contraction in valuation multiples will likely detract from expected returns moving forward. As of 30 December 2015, the JCI Index trades at estimated PE ratios of 15.4X and 13.4X for 2016 and 2017 respectively, as compared to its fair PE ratio of 14.0X. Thus, a star rating of 2.5 Stars "Neutral" remains warranted at this juncture.
Thailand (-4.9% in 4Q 15, -16.6% for 2015 in SGD terms)
Thailand's equity market extended its losses in 4Q 2015, with the SET Index falling another -4.9% over the quarter. In 2015, the SET Index fell -16.6% to become one of the bottom performing markets under our coverage.
The Thai economy strengthened minutely from a 2.8% year-on-year growth in 2Q 2015 to a 2.9% year-on-year rate in 3Q 15, driven by an uptick in private consumption expenditure growth, technical support from the decline in imports and a less hefty decline in goods exports. Private consumption expenditure accelerated slightly from a 1.6% year-on-year growth in 2Q 2015 to a 1.7% year-on-year growth in 3Q 2015 in tandem with lower prices over the quarter. Investment activities dipped -1.2% year-on-year as compared with a 2.7% growth in the previous quarter. A deceleration in public spending growth could be the reason which led to weak business sentiment in 3Q 2015, resulting in lower private investment growth over the quarter. A contraction in investment activities also impacted imports negatively as businesses held back their capital goods imports. While exports remained in negative territory due to low commodities prices, the rate of decline has moderated from a -4.0% year-on-year in 2Q 2015 to a -1.9% year-on-year in 3Q 2015 as a weak THB encouraged a pick-up in export volume for certain segments.
Inflation stayed in negative territory (-1.1%) in 3Q 2015 as global oil prices remained low. However, headline inflation is expected to rise gradually moving forward, and to turn positive in 1H 2016, as the base effect of high oil prices fades. Higher imported prices on the back of a weak THB could be another factor that drives headline inflation higher. Combining these factors, it is likely to see the Thai economy achieving a targeted headline inflation (by the central bank) of between 1.0 – 2.0% in 2016. The central bank is expected to take a neutral stance as policy remains limited due to a weak THB and higher expected inflation.
Companies were posting negative earnings surprise of -28.58% as a whole in 3Q 2015, with utilities and healthcare sectors the major drags over the quarter. 2015 and 2016 earnings were slashed by -6.0% and -5.9% respectively over the quarter, with most of the downward earnings revisions coming from the Consumer Staples and Consumer Discretionary sectors, reflecting downside risks from a further slowdown in domestic private consumption. Earnings growth, on the other hand, is expected to be 0.0% for 2015 and 14.7% for 2016.
Going forward, the recently announced tax incentive framework combined with the on-going infrastructure projects should help to spur growth in private investment going forward, which has been lacklustre for the past 2 quarters. A recovery in investment activities will provide much needed support for the economy as a depressed agriculture sector continues to cap private consumption expenditure growth moving forward. This implies that only a modest recovery in GDP growth is expected in 2016. As of 30 December 2015, the SET index is trading at estimated PE ratios of 14.5X and 12.6X for 2015 and 2016 respectively, which are above its estimated fair PE of 12.5X. Given the expensive valuation metrics and a slow recovery in economic growth, the investment case for Thailand remains unattractive. As such, we retain Thailand's star rating at 2 stars "Unattractive".
Brazil (-2.3% in 4Q 15, -36.5% for 2015 in SGD terms)
The Brazilian equity market, as represented by the Bovespa Index, posted a loss of -2.3% in SGD terms over 4Q 2015 to end 2015 as the worst performing market under our coverage, with losses for the full year at a staggering -36.5% against a backdrop of a faltering economy and an escalating political crisis. The majority of the losses is attributable to the sharp depreciation of the BRL against the SGD by -28.5% in 2015. Given their heavy weightage in the Bovespa Index, local banks Banco Bradesco SA and Itau Unibanco Holding SA delivered the largest contribution to the index's negative performance, with their preference share prices plunging -34.1% and -16.8% respectively in 2015. Companies in the materials and energy sectors also fared badly over the course of the year, with the likes of Vale SA losing -47.0% and -41.1% in its preference and ordinary share values respectively.
The earnings outlook of the Bovespa Index remained subdued over 4Q 2015, as estimated earnings for 2015 were trimmed by -4.3%, while earnings for 2016 and 2017 were also revised downward by -6.8% and -3.2% respectively. Over the full year, estimated earnings have been downgraded by -26.4%, -22.7% and -13.8% for 2015, 2016 and 2017 respectively, with commodity-related sectors bearing the brunt of earnings downgrades as commodity prices remained subdued. The materials sector saw its earnings downgraded into negative territory, while earnings for the energy and industrials sectors were also cut by -66.3% and -57.6% respectively over the course of 2015.
The past quarter saw Fitch Ratings become the second major ratings agency after Standard & Poor's to downgrade Brazil's foreign currency sovereign debt rating to junk status. The agency had cited the country's worsening economic outlook and political crisis as reasons behind the move. On the political front, there was an unexpected shake-up at the top of President Dilma Rousseff's finance ministry, with Nelson Barbosa replacing Joaquim Levy as the new Finance Minister. The economic data rolling out of Brazil has also not been encouraging. Brazil's economy sank deeper into recession in 3Q 2015, with GDP declining -4.5% year-on-year after a downward-revised -3.0% year-on-year fall in the previous quarter, the largest contraction since 1996 when Brazil started measuring GDP by the current system. Despite the central bank's aggressive monetary tightening measures this year, consumer price inflation in Brazil has climbed to a twelve-year high of 10.48% in November, driven by rising transportation costs and food inflation. Brazil's retail sales in October slipped -5.6% year-on-year, after a downward-revised -6.3% decline in September as consumers continued to cut back on their discretionary spending. While the month-on-month seasonally-adjusted figure revealed a slight rebound in retail sales by 0.6%, the retail sector in Brazil is unlikely to see a quick turnaround as elevated inflation, costly credit and a worsening labour market have pushed consumer confidence to its lowest level. Economists have forecasted Brazil's GDP growth for 2015 and 2016 to come in at -3.7% and -2.81% respectively, as the country's economy struggles to regain traction amid poor consumer and business confidence..
With Brazil's economy undergoing a tough time, the road ahead is certainly not easy for the nation, given that growth drivers have weakened significantly and the economy is only expected to rebound in 2017. Despite the current issues, the Bovespa Index trades at estimated PE ratios of 10.2X and 8.0X for 2016 and 2017 respectively (as of 31 December 2015), as compared to its fair PE ratio of 11.5X, offering investors a potential annualised total return of 24.9% by end 2017. A star rating of 4.0 Stars "Very Attractive" for Brazilian equities continues to be warranted at this juncture.
As guided last year, divergent monetary policies between the developed markets (US tightening while Europe and Japan in easing mode) dominated markets in 2015. Equity market returns this time round were more muted than in 2014, and volatility has increased as markets remain concerned over geopolitical tensions, slowing economic momentum in emerging markets like China, as well as declining commodity prices.
As highlighted in our Key Investment Themes and Outlook for 2016, we have removed our overweight in equities relative to bonds. While we expect the global economic expansion to continue, the developed markets of the West appear to have gotten ahead of economic reality, a factor in our decision to remove the overweight in equities as the low expected returns from developed market equities stem from a potential contraction of valuation multiples, detracting from overall returns that are driven by earnings growth and anticipated dividends. We maintain our preference for Asia ex Japan equities (in particular, North Asia), on cheaper valuations, and advocate investors to consider defensive strategies like equity long short funds for the developed markets of US and Europe.
While we have removed our overweight in equities, it does not entail a more positive or overweight position in fixed income as a whole at this juncture. With the Fed expected to maintain and adhere to a gradual pace in its policy tightening stance, volatility in bond yields are expected to be contained. Investors can reach out to the riskier segments of fixed income such as high yield bonds – Asian high yield debt still sport decent spread levels over risk-free securities and remain supported by monetary policy easing by the majority of Asian central banks. Short duration bond funds still makes sense as well despite being a consensus favourite, as longer duration risk-free bond yields still offer little in terms of an additional yield to offset the possibility that rates may rise quicker-than-anticipated.