For qualified investors

Asia market views

09-Oct-2017
By BlackRock

Key takeaways

  • Taiwan and Korea lead net sales
  • China’s RRR cut reaches beyond SMEs
  • Is Japan poised for a cyclical recovery?

Explore our views in more detail

 


China steers activity as Taiwan dips on poor iPhone sentiment

Equity markets continued to rally over the two-week period ended October 6 with the MSCI All Country World Index returning 0.9%. MSCI All Country Asia Pacific ex-Japan (MXAPJ) retreated the first month this year in September but then rebounded, rising 1.7% last week.

China was the primary driver behind the movement of Asian markets over the past two weeks with two key events in the spotlight. A new round of home purchase restrictions was announced by nine cities in China that dragged down its stock market, with real estate down the most. Further, the market rallied on People’s Bank of China’s (PBoC) announcement on the cut to the target reserve requirement ratio (RRR) – the proportion of cash required in bank depositors’ accounts - to support financing for small and medium enterprises (SMEs). This resulted in the MSCI China Index gaining by 4.2% last week.

The country continued to outperform its peers with Malaysia and Indonesia lagging further. Taiwan and Korea led net selling across emerging market Asian equities. Foreign investors offloaded Taiwan shares on poor iPhone sentiment, as one-third of the market is comprised of Apple suppliers. The lack of fresh momentum in Korea has spurred the foreign selloff in its technology sector.

SMEs not the only winners from
RRR cut

Following the State Council of China’s decision on September 27 to cut the RRR targeting to support lending to SMEs, the PBoC announced last Saturday that a large majority of commercial banks will qualify for at least a 50 basis points (bps) RRR reduction, effective January 1, 2018. The bar for eligibility is quite low: all large and mid-sized banks, 90% of city commercial banks and 95% of agricultural commercial banks meet the 1.5% cutoff, entitling them to the 50bps reduction.

In addition to offering liquidity relief to SMEs, the move indicates that the Chinese authorities will not embark on draconian credit tightening that could cause an abrupt economic slowdown, balancing the authorities' drive to advance deleveraging the economy while maintaining short-term stability. Looking ahead, we remain positive on Chinese equities as we believe that the macroeconomic backdrop will remain supportive and domestic risks will be contained.

Will Abe’s snap election work in
his favour?

The US tax reform story is back with the Senate’s release on September 29 to include instructions to pass a $1.5trn tax cut in its budget resolution for FY2018. In addition to US equities,Japanese exporters could be another beneficiary of a revived US tax reform and “Trumponomics” trade that will mean stronger US dollar and weaker yen, placing Japan a more attractive position on top of favourable macroeconomic conditions.

In Japan, the most important political event to watch is the Lower House election on October 22. The snap election was called by Prime Minister Abe to take advantage of a rebound in what had been a sharp drop in his approval ratings. Abe’s economic policies - including monetary policies (which have been supportive to the economy) - will likely continue as long as the Abe government remains in place, despite the fact the Liberal Democratic Party may lose some seats in the election. We see upside in Japan on signs that there is a cyclical recovery in the economy.

Thailand enjoys short-term pickup with broader recovery on the cards

Over the past two weeks, Thailand has been another strong-performing market as the country benefited from robust exports and recent improvement in consumption. But year-to-date performance in Thailand lagged behind its Asian peers due to weak macro conditions, returning 13% YTD while China returned 47% and India returned 21%. The continuing lack of private-sector investment recycle has reduced the attraction of the macro story and the burden of high household debt remains an issue. Despite of these concerns, there is still room for a recovery evidenced by the recent pickup in consumption and rising government spending on infrastructure. Thailand offers strong company-specific potential so we are focusing on bottom-up stock selection.

Country views by BlackRock Asian Fundamental Equity Team

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