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Top Markets 1H 2016: Markets Shrug Off Brexit Blues
July 11, 2016

As we move into 2H 2016, we take a closer look at some of the top-performing markets for the first half of the year (Brazil, Russia and Thailand) as well as those on the other side of the fence (Europe, China and Hong Kong) 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

 Top Markets 1H 2016: Markets Shrug Off Brexit Blues

Global equity markets staged a strong rebound in the second quarter of 2016, only to see the results of the referendum on the UK's European Union (EU) membership halt the advance. Prior to the release of the referendum's results on 24 June 2016, the major regional markets had rebounded strongly following a terrible drop in the first six weeks of the year and on a year-to-date basis as of 23 June 2016; the US was down slightly by -2.3%, Europe and Japan had reduced their losses from -15.1% to -6.5% for the former and from -17.4% to -7.9% for the latter. Asia ex Japan, as measured by the MSCI AC Asia ex Japan index, was down by -4.9%, off its year-to-date low of -13.0% and Global Emerging markets marginally lower by -0.6% having rallied hard from earlier losses of -12.1%.

Subsequent to the referendum's results, severe volatility hit the markets as financial assets re-priced. For example, the GBP lost -6.7% against the SGD, while European equities tanked -8.0%, all in a single day. While financial assets re-priced and volatility was encountered, by the end of June, markets appeared to have regained their footing as most major regional markets only saw minute changes apart from Europe, which was lower by -6.0% from its pre-UK referendum levels.

Amongst the worst performers for 1H 2016 were the likes of Europe (-12.5%) and Japan (-8.8%), with the Bank of Japan's (BOJ) foray into negative rates perversely seeing the Japanese Yen strengthen, the opposite effect of what it wanted to achieve. As for Europe, the continent had been recovering quite nicely from the February lows prior to the UK referendum which has now cast doubts on the long term future and viability of the European Union and the Eurozone.

Amongst the best performers in 1H 2016 were the likes of Brazil and Russia, delivering gains of +40.7% and +17.2% respectively as the former saw some alleviation of political uncertainty following the impeachment of Dilma Rousseff, while the latter benefited from the huge +33.3% rally in crude oil prices as measured by Brent crude oil (in USD terms). Rounding up the top three performers was yet another emerging market, Thailand, which saw its stock market rise by +9.8% to see the top three performing markets comprise solely of emerging markets.

At the other end of the performance charts were two Asian markets and Europe. European equities lead the losses, with the UK referendum sending equities into a tailspin as they ended 1H 2016 with a loss of -12.5%. China-H and Hong Kong equities were the other two largest laggards amongst the markets we cover, with the former posting a -10.9% decline and the latter not far behind with a -9.8% drop. While Japanese equities posted a loss of -18.2% in local currency terms, the appreciation of the JPY against the SGD by +10.7% helped to ease losses for SGD-perspective investors.

Table 1: Market Performance (In SGD Terms)



2Q 2016 Returns

1H 2016 Returns

























Emerging Markets

MSCI Emerging Markets












S&P 500







Asia ex-Japan

MSCI Asia ex-Japan




MSCI World




Nikkei 225



Hong Kong

Hang Seng Index




HSML 100




Stoxx 600



Source: Bloomberg, iFAST Compilations

Returns in SGD terms excluding dividends, as of 30 June 2016

As we move into 2H 2016, we take a closer look at some of the top-performing markets for the first half of the year (Brazil, Russia and Thailand) as well as those on the other side of the fence (Europe, China and Hong Kong) 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 30 June 2016]

Top Performing Markets

Brazil (+40.7% in SGD Terms)

The Brazilian equity market was sent into a frenzied rally, with the benchmark Bovespa Index surging 40.7% in SGD terms over 1H 16 to top the list of equity markets under our coverage as the Brazilian Senate approved the impeachment motion against President Dilma Rousseff, paving the way for her permanent removal from office. After falling to its lowest level in two decades last year, the Brazilian real (BRL) has since rebounded strongly as political uncertainty dissipated, extending its gains from the previous quarter with a 11.7% appreciation against the Singapore dollar (SGD) to contribute to overall gains in 1H 16.

While the Bovespa Index turned in a spectacular performance in 1H 16, the economic data rolling out of Brazil has not been encouraging. Brazil's economy spiralled deeper into recession, with its 1Q 16 GDP declining -5.4% year-on-year, after a -5.9% year-on-year contraction in the previous quarter, although the latest set of data trumped market expectations for a -5.9% year-on-year decrease. Brazil's consumer price inflation came in at 9.32% year-on-year in May, a slight acceleration from the 9.28% seen in April. Although inflation remains stubbornly high above the official 6.5% inflation ceiling, with policymakers placing a greater focus on the risks to economic growth in the country, the central bank could start an easing cycle later this year, if inflation decelerates in the months ahead. Meanwhile, retail sales in Brazil declined for the thirteenth consecutive month by -6.7% year-on-year, while industrial production also extended its slump by -7.2% year-on-year in April. Economists have forecasted Brazil's GDP growth for 2016 and 2017 to come in at -3.4% and 1.0% respectively, as the country's economy struggles to regain traction amid poor consumer and business confidence.

The Bovespa Index has rebounded by more than 40% since the beginning of this year, with market valuations currently at much higher levels. The Bovespa Index is currently trading at forward PE ratios of 13.5X and 10.4X projected earnings for 2016 and 2017 respectively (as of 30 June 2016). While 2017's estimated PE is below its our fair value estimate of 11.5X, its upside potential is relatively less appealing as compared to the other more attractively rated equity markets. With markets having priced in a change of government and looking beyond the political turmoil, the investment case for Brazil now hinges upon its economy, which is currently not showing signs of a quick recovery. As such, we have downgraded Brazil's equity market from 4.0 Stars "Very Attractive" to 3.0 Stars "Attractive" over the course of 2Q 16.

Russia (+17.2% in SGD Terms)

Russian equities, represented by the RTSI$ Index, posted a 17.2% gain in SGD terms over the first half of 2016, once again coming in at the top of the performance ladder. In local currency terms, the index was up 6.2% in 1H 16, with the RUB rallying against many currencies alongside the rebound in crude oil prices over the past 5 months (the RUB is 14.1% and 8.8% higher against the USD and the SGD in 1H 16). In 1H 16, companies like airliner Aeroflot were some of the top performing stocks, with its share price rallying more than 44% year-to-date. Companies from the Industrials sector like miner Polymetal International were found at the top of the performance table, as well as steel producers like Novolipetsk Steel, Magnitogorsk Iron & Steel and Severstal which saw their share prices rising by 32.0%, 22.1% and 12.0% respectively over the past six months.

Earnings estimates of Russian companies on aggregate for 2016 were revised 0.3% higher over 2Q 2016, while 2017's estimated earnings were revised -3.4% downwards (as of 29 June 2016). As a whole, earnings are expected to contract -5.9% this year, before growing by 13.4% in 2017 (in RUB terms as of 29 June 2016). Among some of the notable revisions have been to the financials and industrial sector over 2Q 16, with the former seeing better-than-expected earnings, cost control measures and improving asset quality.

On 10 June 2016, the Central Bank of Russia (CBR) decided to lower Russia's key rate by -50 basis points (from a prior 11.0% to 10.5%), citing in its policy update that "there is more confidence in steadily positive trends in the inflation dynamics", suggesting that disinflationary pressures have allowed them to once again resume their easing cycle via rate cuts. The CBR also added that "consumer price growth rates will keep on going down further, primarily influenced by the demand-side restraints", and lowered its 2016 inflation forecast. Additionally, the central bank reiterated that "import substitution and non-commodity exports continue to expand and additional growth areas in manufacturing are taking shape" despite the overall sluggish state of various industries across the country, particularly from the traditional sources of growth for the economy. As we have guided earlier, Russia's economy continues to rebalance slowly away from commodity-related industries, but time would be needed before economic momentum start to accelerate in the country again.

As of 30 June 2016, the RTSI$ Index trades at estimated PE ratios of 7.1X and 6.3X for 2016 and 2017 respectively as compared to its fair PE ratio of 7.0X, with potential upside now lower than before as valuations rose alongside rising crude oil prices. Volatility is still expected in the near-term as investment and business sentiment is still weighed down over geopolitical tensions as well as the overall direction of crude oil prices. While we retain Russia's star ratings at 4.5 Stars "Very Attractive", we are keeping a watchful eye on overall valuations should there be continued gains in stock prices without overall improving fundamentals.

Thailand (+9.8% in SGD Terms)

While most of the markets under our coverage struggled to stay in green over the past six months, Thai equities seemed to be doing it at ease. After a 6.8% gain (in SGD terms) in 1Q 16, Thai equities, represented by the SET Index, continued its positive momentum, delivering a return of 2.7% during 2Q 16. On a year-to-date basis (as of 30 June 2016), Thailand's equity market has made a 9.8% gain to continue its stay as one of the top contenders on the performance ladder.

On the economic front, the Thai economy has continued its resilient growth, registering a growth rate of 3.2% year-on-year for 1Q 16, which is higher than the 2.8% year-on-year increase recorded during the previous quarter. This is the fastest quarterly growth for the kingdom in three years. On a quarter-on-quarter basis, Thailand expanded by 0.9% quarter-on-quarter in 1Q 16, beating consensus forecasts of a 0.6% expansion as well as prior quarter's 0.8% growth rate. The better-than-expected GDP data was contributed by the significant growth in government spending, with the GDP component growing at a whopping 8.0% year-on-year as compared to the prior quarter's 4.8% expansion. The easing of the slump in external trade has also helped to lift the GDP data over the quarter. While external trade has improved, the segment might not contribute much to the nation's growth going given the expectation that growth in this segment is likely to remain subdued. Robust government spending and a booming tourism industry will continue to be the main drivers that will support the nation's economic growth going forward. After a tremendous year-on-year growth of 20.4% in 2015, tourist arrivals surged by 14.1% year-on-year for the first fourth months of 2016 as compared to the period a year ago.

Looking at the valuation metric, the Thai equity market is by no means attractive. As of 30 June 2016, the SET Index is trading at a PE ratio of 15.6X, significantly above our fair PE estimate of 12.5X. We continue to remain vigilant on the market's deteriorating earnings estimates and the growing discrepancies between surging price and deteriorating corporate earnings of Thai equities. Any further downside risks on the earnings growth, as we monitor, might prompt a star rating downgrade for the Southeast Asian kingdom. At this juncture, we retain the star rating for Thailand at 2.5 Stars "Neutral".

Bottom Performing Markets

Europe (-12.5% in SGD Terms)

The European equity market was sent into a steep slide in the last six days of trading upon the UK's referendum results, with the Stoxx 600 losing -8.0% of its value on 24 June 2016 alone. While European equities have ended the first half of 2016 as the worst performing market under our coverage with a loss of –12.5%, it has still managed to claw back some ground from its -17.0% low on 11 February 2016, although it is –10.5% away from its year-to-date high.

The European economy has been stronger than expected in 1H 2016, with 1Q 2016 GDP figures coming in above expectations and being driven by strength in domestic demand and corporate investment. Alongside a relatively strong 1Q 2016 GDP growth rate, Eurozone Purchasing Manager Indices readings had indicated that business activity has continued to increase while Eurozone aggregate sentiment indicators such as the ZEW Eurozone Expectation of Economic growth and the Sentix Investor Confidence gradually picked up from their lows in the first quarter. While the latest Eurozone PMI readings have weakened slightly, another quarter of growth for Europe in 2Q 2016 is likely. However, given the uncertainties associated with the Brexit result, economic growth in 2H 2016 is more than likely to be revised down with sentiment readings likely to take a hit or two over the next few readings. Given all that has transpired, it would not surprise us if the European Central Bank (ECB) were to keep its monetary policy "lower for longer" and an extension of its asset purchase program is a distinct possibility.

The fallout of the UK's referendum's decision to leave the European Union will take some time to be fully known. For now, we see heightened downside risks to the UK's economy, GBP, UK equities and corporate bonds. Given that the economy is expected to weaken moving forward, the Bank of England (BOE) is likely to have to cut rates or restart its quantitative easing programme, all of which are likely to add downward pressure to the GBP, while a weaker economy should spell negative news for UK risk assets. Time will be needed to see how the situation will unfold as well as for further clarity as to the effects Brexit will have on both the economies and financial markets of the UK and the Eurozone.

At current levels, the market trades at 15.5X and 13.6X based on 2016 and 2017 estimated earnings, as compared to its fair PE ratio of 13.5X. At current valuations, investors will be paying close to fair value for European equities based on 2017's estimated earnings. We maintain our 2.5 Stars – Neutral rating on the market at this juncture, with cautiousness warranted over the effects of Brexit.

China (-10.9% in SGD Terms)

After the disappointing performance in the first quarter of this year, Chinese equities, as represented by the Hang Seng Mainland 100 (HSML100) index, continued to be hindered by global risk-off sentiment, ending 1H 2016 with a loss of -10.9% (in SGD terms).

Heightened concerns over slowing economic growth, deterioration of credit quality deterioration in sectors with overcapacity were the key risk factors leading Chinese equities to plunge in the first half of the year. The default of a State-Owned Enterprise (SOE), Dongbei Special Steel, spiked risk off sentiment for investors at the end of March. The default may have a symbolic meaning to the market as SOE bonds may no longer be guaranteed by the government. While the market is expecting more defaults in the SOE bonds in the coming months, the government is exploring the possibility of a bond-for-equity swap program to serve as repayment. This may imply higher non-performing loans to Chinese banks and harming banks' earnings in 2016. As such, earnings forecasts for the China-H market this year is not particularly impressive as given the financials' heavy weight.

As stressed in our previous view, we think active management will be key to investing in China. As the divergence in sectoral performance may intensify in the year ahead, investors should pay extra attention to sector allocations when investing in Chinese equity funds as this will make a noticeable difference in performance returns.

While Chinese equities have continued to underperform global equities this year, its underperformance translates into valuations that continue to be very attractive. As of 30 June 2016, the estimated PE for the HSML100 index is at 9.3X and 8.3X for 2016 and 2017 respectively, significantly below its fair value of 13X. At current valuations, we believe risk factors have largely been priced into depressed valuations. We continue to maintain a favourable outlook on Chinese equities, with a 5-star "Very Attractive" rating.

Hong Kong (-9.8% in SGD Terms)

Hong Kong market continued to be one of the more unpopular markets among global investors, as the shadow of China's slowing economy hangs over it amidst fears roused from Brexit. Represented by the benchmark Hang Seng Index, the market lost -9.8% in 1H 2016 (in SGD terms) as of 30 June 2016.

With major economies exports shrinking and intensified political uncertainty, Hong Kong's outlook as a small and open economy deteriorates. The aftermath of Brexit may have a negative impact on the trade-reliant economy. Among the 50 constituents of the Hang Seng Index, constituents with larger UK exposure such as HSBC, CK Hutchison Holdings and Power Assets Holdings suffered hard hits on the day when the UK's referendum result was announced. Although the negative sentiment of Brexit may have been digested in the short term, however investors should be aware of negative impacts towards financial institutions like HSBC and Standard Chartered with UK links. The possibility of reducing investment and headcounts or even moving operations out of Britain may have impacts on earnings.

At the same time when Chinese industrial companies are undergoing structural reforms, companies with substantial trade links to China are expected to remain mute. We expect Hong Kong companies to continue grappling with headwinds stemming from the global economic uncertainty, especially the trading and logistics services industry, which contributes the most to both GDP and employment in Hong Kong. As major economies around the globe suffer from a sluggish global growth, Hong Kong's trade-reliant economy may also be subjected to this external environment.

Despite a gloomy economic outlook for the year of 2016, the Hong Kong equity market is currently trading at cheap valuations. In terms of valuations, the estimated PE ratio of the Hang Seng Index is at 11.5X and 10.4X for 2016 and 2017 respectively, and are well below our fair PE estimate of 14.5X as of 30 June 2016. We maintain our 5-star "Very Attractive" rating on the Hong Kong equity market. However, we expect the market to continue to remaining volatile as uncertainty following Brexit prevails.

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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