Market Overview: Asia

This week we are focusing on activity in Asian markets. We will be highlighting changes in Singapore, and China, as well as looking at the impact of the recent missile strike in Syria on Asian markets, and stock prices further afield. The attack had some immediate effects on markets, however, most stocks seem to have re-stabilized.

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Singapore

It has been announced that the Singaporean government will increase spending on public infrastructure from SGD18.3 million to SGD30 million by 2020. This comes as they fell in the rankings of the World Economic Forum’s Global Competitiveness Report from number 2 (2012-2013) to number 5 (2014-2015). Projects will be carried out in the areas of land transport, air and sea transport, utilities, and healthcare with planned building of four new state hospitals between 2020 and 2030.

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China

In the week ending April 2nd property prices rose 27% from the same time last year in 26 major Chinese cities. Leading this increase were Shanghai, with a rise of 72%, and Guangzhou with a rise of 77%. Moreover, 17 major property developers saw sales growth of 82% in March, similar to that of 91% in the January-February period (Source: Barrons).

The Effect of Air Strikes on the Markets

Last week saw the US fire dozens of missiles at a Syrian airfield, damaging infrastructure including the runway. The strike was carried out in retaliation to a chemical attack that occurred in a rebel-held area of Syria earlier. Several stocks have experienced increases and decreases as a result of the strike. US futures fell, with S&P 500 futures off 5 points and Dow Jones futures down by 44 points. Asian shares also experienced an initial drop before re-stabilizing.

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However, not all markets saw drops. The Yen saw an increase against the Dollar, and commodities such as gold and oil saw a rise in prices. London spot gold prices were 1.3% higher recently while Brent crude futures rose more than 2% before levelling to a gain of 1.42% at $55.67 per barrel. US crude increased by 1.61% taking it to $52.53. The reason for increases in the prices of these goods is because investors switched over to them, moving out of riskier investments. In the case of oil the price rose due to investors’ concerns that supply might be disrupted by the military in the region. However, despite these fears, CNBC says that it is unlikely that oil supplies will be restricted by Syrian military forces as it would be equally disadvantageous for them.

Emerging Markets: The Best Is Yet To Come

Emerging markets continued their upward climb in the third quarter and now emerging market economies are back in growth mode, their currencies are recovering, and GDP growth is accelerating.  We are expecting the transition to a long-term, sustainable growth rate in China to slow to 6.7% in 2016 and slow to a little over 6% in 2018.  In the rest of Asia, we are looking for a good growth rate of 4.8% this year and over 5% in 2017.  Latin America has been dragged down by Brazil over the past two years and they appear to have turned the corner in the third quarter with a -3.8% GDP growth rate and are expecting 1.6% GDP growth in 2017.  It seems that with the impeachment trial over, Brazil is marching forward again.  With the help of this good growth in emerging markets and stable commodity prices, we are expecting a continuation of the “Low and Slow Growth” as the global economy approaches 2.4% growth.

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For the third quarter of 2016, the Emerging Markets Portfolio returned 8.73% (pure gross) and 8.29% (net) versus 9.15% for the MSCI Emerging Markets Index.  The portfolio returned 23.33% (pure gross) and 21.28% (net) for one-year versus 17.21% for the benchmark.  Stock selection and/or country weightings in Argentina, Philippines, Turkey, Chile, and Colombia aided the portfolio’s performance.  However, stock selection and/or country weightings in Russia, China, Taiwan, South Korea, and India hindered performance.  In relation to sectors, positions in consumer services, energy minerals, communications, consumer durables, and industrial services aided performance.  Sector positions in non-energy minerals, electronic technology, commercial services, retail trade, and utilities hurt the portfolio’s return.

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In the first quarter’s commentary, we stated that no matter the outcome of the Brexit vote, it would not affect the markets, and it has not; the emerging markets have done exceedingly well in this environment.  The United States has much influence in the growth of the world and globally we have seen populism arrive on the political scene in the United Kingdom, Italy, and other nations.  In this Presidential election, both candidates have promoted protectionism which Moody’s Madhavi Bokil has called harmful for global growth.  Hopefully, a congress that supports free trade will rule the day, TPP will be ratified, NAFTA will stay intact, and the “Low and Slow Growth” economy will grow at a faster pace than the projected 1.5% in 2016 and 2% in 2017 rates.

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The Emerging Market economies are back in growth mode, their currencies are recovering, and GDP growth is accelerating.  We expect that this growth mode will continue for the foreseeable future.  The portfolio’s high conviction, lower turnover investment philosophy/strategy, which combines quantitative and fundamental based analysis, should prosper in this environment.

The Emerging Markets Portfolio

It is an interesting time for Emerging Markets. 2016 is shaping up to be a good year for them in a time when many developed markets are struggling. Earlier on this week, the MSCI’s emerging markets index did better than its developed markets index over the past year, but what exactly does this mean for investors?

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Although it appears that emerging markets may finally be recovering after a long bear market, there are a range of circumstances which mean it may be too early to celebrate. To begin with, world growth has been sluggish and the US dollar is weak, distorting any clear view of Emerging Markets’ true performance. Although long-term projections for India and China are strong, both countries registered declines in the most recent period. With the performance of the two strongest Emerging Market economies shaky, the market is being carried by Brazil – whose current political and economic situation makes any prediction highly speculative – Korea and Peru. Moreover, this recovery could be attributable to Emerging Markets reliance on the materials and information technology sectors. Both sectors are performing well, but any decline in metals or oils could severely impact recovery.

 

As it stands, the greatest returns from the Emerging Markets come from the places carrying the greatest risk, making the short-term extremely volatile.

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This risk is one which we take strongly into account when compiling the Henry James Emerging Markets Portfolio. Our investment process is an objective, bottom-up, quantitative screening process designed to identify and select inefficiently priced international stocks, with superior return versus risk characteristics. This is then combined with quarterly, top-down risk-mitigating country allocation system rebalancing, in which the agreement team over weights highly-ranked countries and under weights those which are lower-ranked. Typically, the portfolio invests in 50 to 70 stocks that pass our disciplined fundamental and quantitative criteria and we let our winners run. The primary performance benchmark is the MSCI Emerging Markets Index.