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Top Performing Markets for 1Q 2010: Indonesia leads the pack yet again
April 6, 2010

In this quarterly update, we look at the top and bottom performing markets for the quarter, and examine the factors which drove performance.


Author : iFAST Research



Untitled Document
  • Most equity markets turned in positive performances for 1Q 10
  • Quarterly performances ranged between -6.3% and 9.2%
  • Top performing markets were Indonesia, Thailand and Malaysia
  • Bottom three markets were Hong Kong, Taiwan and China
  • At the close of 1Q 10, the equity markets of Indonesia and Brazil are fast closing in on their all-time highs
Table 1: Top Performing equity markets in 1Q10
Market Indices YTD Return

Indonesia

JCI

9.2%

Thailand

SET

6.4%

Malaysia

KLCI

5.7%

Russia

RTS

5.2%

Tech

Nasdaq 100

1.7%

US

S&P 500

1.3%

India

BSE SENSEX

0.4%

Japan

Nikkei 225

-0.1%

Korea

KOSPI

-0.4%

World

MSCI World

-0.8%

Emerging Markets

MSCI Emerging Markets

-1.4%

Asia ex-Japan

MSCI Asia ex-Japan

-2.4%

Singapore

FTSE STI

-3.3%

Brazil

Bovespa

-3.4%

Europe

DJ Stoxx 600

-5.3%

China

HSML100

-5.3%

Taiwan

TWSE

-5.9%

Hong Kong

HSI

-6.3%

Source: Bloomberg, iFAST compilations; YTD returns as of 31 March 2010, in INR terms

Negative issues continue to cloud the investment environment, leaving market sceptics with much to shout about. Greek debt problems, Fitch’s downgrade of Portugal’s debt rating, further expected Chinese monetary tightening, a spat between the US and China over the RMB, continued high US unemployment and a weak US domestic housing market are just some of the few issues which have given investors reason to fret. At the same time, economic conditions are turning for the better, with developing economies leading the charge.

After displaying weakness in the early part of 2010, global equity markets continued to climb the metaphorical “wall of worry”, an often-used phrase to describe positive market performance in the face of negativity. Markets under our coverage displayed a wide range of returns (-6.3% to 9.2%), suggesting that investors may be applying a more focused approach to market selection, unlike in 2009, where every market turned in a positive performance. The disparity in returns was even more evident within Asian markets, which contributed the three top-performing markets (Indonesia, Thailand and Malaysia), but also the bottom-three markets (Hong Kong, Taiwan and China).

In this quarterly update, we take a closer look at the top-three performing markets (Indonesia, Thailand and Malaysia), as well as the bottom three (Hong Kong, Taiwan and China).

Indonesia (JCI; +9.2%)

Indonesia continued with its spectacular performance during the 1Q 10 and was the best performing market under our coverage during the period, adding on to the strong gains in 2009. The JCI’s performance has been led by strong domestic investor interest as well as capital inflows, given the country’s strong relative economic performance as compared to other ASEAN countries. The country posted 2009 annual economic growth of 4.5%, the third-highest in Asia after China and India. The strong growth is backed by solid domestic consumption and a rebound in exports.

The economy is expected to chart higher growth in 1Q 10, in line with improvements in domestic demand. In February 2010, the Consumer Confidence Index (CCI) stood at 105.3, holding above the 100 level which indicates optimism. Generally, respondents are optimistic over future economic conditions, which bodes well for domestic demand. In addition, the planned 5% increase in civil servants’ salary in early 2010 also provides a boost to purchasing power.

Meanwhile, exports surged by 59% in February on the low base effect and higher demand for both oil and gas and non-oil and gas exports. Strengthening commodity prices also provides an upside driver for the stock market. Indonesia is a resource-rich country which exports tin, copper, nickel, gold, coal, palm oil, etc. Commodities such as nickel, coal and crude oil have gained 29.0%, 10.6%, and 3.5% on a year-to-date basis (as of 30 March 2010).

Consensus earnings growth for Indonesian equities is at 18.9% and 18.9% for 2010 and 2011 respectively. The estimated PE for the Indonesia equity market is at 15.3X and 13.0X for 2010 and 2011 respectively (as at 29 March 2010). Given the high yields on Indonesian Government bonds, Indonesian equities appear relatively less attractive and we have a 3.5 star “attractive” rating on the market.

Thailand (SET; +6.4%)

The Thai market was the second-best performing market in the first 1Q 10, a surprisingly strong performance given the recent political climate. Thailand ended its year-long economic contraction in 4Q 09 with GDP growth of 5.8%. The broad-based recovery was supported by a turnaround in household consumption which gained 1.4% year-on-year (3Q 09: -1.3%) and a rebound in exports by 4.1% year-on-year after a three straight quarters of declines.

Positive indications from the private consumption index (PCI) and private investment index (PII) further reaffirm a broad-based recovery in the country. PCI rose 4.7% year-on-year in January 2010 while PII rebounded in January with 5.2% year-on-year growth. Manufacturing output continues to see robust expansions, with manufacturing production index increasing 28.6% year-on-year and capacity utilisation returning back to pre-crisis levels (Jan 10: 68%).

Bank of Thailand’s move to liberalise the rules on capital outflows on 2 February is a positive for the Thai economy. The relaxation of capital outflows is aimed at providing exporters and importers with more flexibility to better manage their exchange rate risk and to reduce the upward pressure on the baht by encouraging investment flows.

We recognise that there are domestic risks on the political front, while the pollution issues in the Map Ta Phut district have yet to be resolved. However, economic growth potential remains intact as broad-based recovery is underway. In addition, Thailand’s exports look set to benefit from the revival of global trade. Consensus earnings estimates for the Thai equity market were 15.9%, and 16.6% for 2010 and 2011 respectively, which translate to a forward PE of 14.2X and 12.8X for the two respective years (data as at 29 March 2010). We have a 3.5 star “attractive” rating on the Thai equity market.

Malaysia (KLCI; +5.7%)

The normally-defensive Malaysia equity market remained resilient in 1Q 10, making it the third-best performing market under our coverage. In 1Q 10, economic numbers released were largely positive, with some exceeding market expectations. 4Q 09 GDP rose 4.5% year-on-year, bringing the full year GDP growth of 2009 to -1.7%. This was ahead of the market consensus of -2.4%. The expansion was broad-based across most economic sectors except for mining. The main contribution to the better performance came from manufacturing and services sectors which rose 5.3% year-on-year and 5.1% year-on-year respectively.

Export numbers were encouraging with increase of 37.0% year-on-year in January 2010, mainly driven by electrical and electronic products exports and commodity-related exports. Imports improved on the back of higher imports of intermediate goods imports, which could be a signal of further expansion in exports in the coming months.

Owing to the stronger than expected economic rebound, the central bank hiked the Overnight Policy Rate (OPR) by 25 basis points to 2.25% on 4 March 2010. This startled many investors as the street was expecting a rate hike only by 2H 10. Investors seemed to interpret BNM’s move as an indication of a brighter economic outlook, as the KLCI outperformed other markets in the region over the next two trading days. In addition, the central bank forecasted economic growth of 4.5% to 5.5% for 2010 in its latest statement on 24 Mar 2010, higher than the Ministry of Finance’s forecast of 2.0%-3.0% back in October 09, indicating increasing confidence in the economy’s growth.

The unveiling of the New Economic Model (NEM) on 30 March 2010 by the Prime Minister of Malaysia could further prop up the economic outlook as NEM was aimed at introducing a more liberalised and market-driven economy coupled with enhancing the local workforce, which could further attract investments from overseas.

Owing to the stronger economic rebound and brighter economic outlook, Malaysia market remains attractive. Corporate earnings growth is expected to be 23.7% and 15.2% in 2010 and 2011, translating into PEs of 15.4X and 13.4X for 2010 and 2011 respectively as at 30 March 2010. We maintain a 3.5 star “attractive” rating on Malaysia market.

Hong Kong (HSI; -5.9%)
China (HSML100; -5.3%)

In the 1Q 10, the Hong Kong and China equity markets were laggards and were respectively the worst and third-worst performing markets under our coverage. The People’s Bank of China (PBoC) hiked banks’ Required Reserve Ratio (RRR) twice to 16.5% (1% below the level before the financial crisis) in the first quarter. The market continues to worry that pre-mature exit strategies may occur in China and is speculating that a Chinese rate hike could come as early as in the second quarter. In addition, the government started to impose stricter control on lending by instructing Chinese banks to follow the target lending quota strictly.

In addition, the strong growth in new loans made in 2009 and early 2010 lead to investor concern over the quality of loans as well as the capital adequacy levels of Chinese banks. In fact, the Big Four Chinese banks have already announced capital raising plans in 2010. All of them stated that the capital raised will be used to increase their capital adequacy ratios. Investors worry that the potential capital raising activity as well as a potential rate hike will pull liquidity from the market. Hence, market sentiment fluctuated along with the Chinese government’s policy as well as the Chinese banks’ capital raising announcements in 1Q 10.

In fact, the China A-share market displayed a high level of concern on the Government’s stance on the various exit strategies. Shanghai A-shares fell about 4.5% in the first quarter, while the Hang Seng Mainland 100 Index also delivered a negative return.

On the other hand, HSBC posted full-year net income that missed analyst estimates due to the increase in non-performing loans and a decline in profits in the Asia region. HSBC accounts for about 15% in the Hang Seng Index weighting and the stock’s 11.5% decline in the first quarter dragged down the overall performance of the Hang Seng Index.

In terms of valuation (as of 31 March 2010), the estimated PE ratios for the HSI and HSML100 are 13.3X and 16.2X respectively. We believe that in the second quarter, Hong Kong and China markets are likely to rebound based on their strong earnings growth and cheap valuation. We do agree that a correction might happen when the Chinese government starts to hike its benchmark rate. If this occurs, we believe that it provides the best opportunity for investor to increase their Hong Kong and China equity exposure in the portfolio. We have a 4.5 star “very attractive” rating on both markets.

Taiwan (TWSE, -6.3%)

Taiwan’s equity market was the second-worst performing market under our coverage for the 1Q 10. A slew of negative news flow in January spurred profit-taking activity after the huge rally in 2009. In January, the unexpected increase of the reserve requirement ratio by the People’s Bank of China impacted investor sentiment and caused capital outflow from the Greater China market. However, this long-awaited pullback has made valuations attractive again.

On the economic front, we expect to see a full recovery of the island’s economy as led by export normalisation this year. Exports and manufacturing data have shown strong double-digit growth in the first quarter 2010, thanks to the China-led recovery and the low-base effect. The robust recovery in the manufacturing sector which employs 40% of the workforce will likely ease unemployment and bolster domestic consumption.

 Moreover, the increases in spending and rehiring of workers by major technology and electronic corporations paint a bright industry outlook. The closer cross-straits ties are likely to bring more business opportunities to Taiwanese corporations. After the signing of the memorandum of understanding (MOU), the Economic Cooperation Framework Agreement (ECFA) is expected to see more progression in the first half of the year. These factors are likely to trigger further earnings upgrades.

The consensus earnings for 2009 have already surpassed our revised estimates made in August 2009 and are marginally below our 2010 earnings estimates. As of 29 March 2010, earnings are expected to grow by 69.6% and 16.2% respectively. On an annualised compounded basis over the next two years, the earnings growth is the largest among markets in the Asia ex-Japan region. Therefore, we maintain the Taiwan equity market as 4 stars “very attractive”, over a three-year horizon.

Several markets closing in on all-time highs in 2010

Table 2: Markets closing in on historical highs
Market Indices Off historical high*

Indonesia

JCI

-1.9%

Brazil

Bovespa

-4.3%

Malaysia

KLCI

-12.9%

Thailand

SET

-13.9%

India

BSE SENSEX

-16.0%

Korea

KOSPI

-18.0%

Emerging Markets

MSCI Emerging Markets

-24.5%

Singapore

FTSE STI

-24.6%

US

S&P 500

-25.3%

World

MSCI World

-28.1%

Australia

S&P/ASX 200

-28.6%

Asia ex-Japan

MSCI Asia ex-Japan

-28.7%

Hong Kong

HSI

-32.9%

Europe

DJ Stoxx 600

-34.2%

China

HSML100

-36.4%

Taiwan

TWSE

-36.6%

Russia

RTS

-36.8%

Tech

Nasdaq 100

-58.4%

Japan

Nikkei 225

-71.5%

Source: Bloomberg, index returns exclude dividends and are in local currency terms; *data as of 31 March 2010

The wide disparity of returns since the depths of the financial crisis has resulted in several markets approaching their all-time highs, while others are still some light-years away from attaining their previous glory. As of 31 March 2010, indices like Indonesia’s JCI and Brazil’s Bovespa were less than 5% off their pre-crisis peaks, while major indices like the MSCI World and S&P 500 languish 28.1% and 25.3% below their 2007 peaks. Markets like the tech-heavy Nasdaq 100 and Japan’s Nikkei 225 which fell victim to stock market bubbles are the furthest from their previous peaks, and serve as a constant reminder to investors not to chase stock markets in a bubbly environment.

     

 


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 offer document/scheme additional information/scheme information document. 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 in the website.


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