Top markets 1H17: Asia reigns global equities

As a whole, equity and bond markets continued their steady march higher in the second quarter of 2017, contributing to decent overall gains year-to- date. While there has been a ‘mini sell- off’ among the famous tech giants of Silicon Valley (Facebook, Apple, Netflix, Alphabet, Amazon, Microsoft) in mid- June that caused some risk aversion across financial markets globally, markets have held up well thus far.

Consequently, the MSCI AC World Index, representing the global equity market, inched higher to clock a 0.6 per cent gain in the second quarter of 2017 (2Q17), making year-to-date gains 5.6 per cent. On the other hand, bonds generally underperformed equity markets, with the JPM Global Aggregate Bond Index posting a 0.3 per cent return in the second quarter (year-to-date 0.2 per cent return).

In Europe, a slew of economic data indicates that economic recovery is increasingly entrenched across the continent. Industrial production is still on an overall uptrend, and retail sales data across the eurozone (including the periphery countries) is improving moderately. Various leading indicators point to continued expansion in the region as well, with advance PMI readings of various core countries like Germany and France continuously beating expectations and firmly within expansionary territories and those of the periphery ( like Spain and Italy) on a gradual ascent.

Additionally, the various victories of pro-European Union ( EU) centrist candidates in recent elections among core EU member countries have led to a decline in political risk premiums, spurring investment sentiment and interest for Europe’s asset markets, and causing a rally in the euro against many currencies over the quarter. However, a cloud of uncertainty still remains over the UK, as Brexit negotiations have begun and as Britain prepares to divorce from the EU.

Across the Atlantic in the US, the Federal Reserve raised its benchmark interest rate for the second time in 2017 at its June meeting, bringing the Fed Funds rate to a one to 1.25 per cent range. The Fed’s latest move was widely expected by market participants and investors. In its policy statement, the Fed reaffirmed that there were moderate improvements in economic activity and that the labour market has continued to strengthen.

Despite weaker than expected inflation data, as seen in the softness in the personal consumption expenditures price index ( PCE), the Fed has expressed that inflation should stabilise at the two per cent target over the medium term.

The Fed also revised its GDP growth estimate for 2017 upwards by 10 basis points to 2.2 per cent, and the committee has left the dot plot chart unchanged, indicating that another 25 basis point rate hike remains on the cards this year. We reiterate that the Fed will continue to remain data- dependent in its approach, and maintain its gradual stance in normalising monetary policy. With regards to its balance sheet policy, the timing of its implementation is also unclear and remains to be seen.

Asian markets continued their ascent from their nice run-up in 1Q17, with the MSCI Asia ex Japan Index climbing 4.4 per cent in 2Q17 (year-to- date 16.5 per cent gain). Economic data continues to gradually improve across the region, and exports growth has continued to remain supported as external demand picks up and as the recovery in the global semiconductor market continues, boosting electronics exports.

The onshore Chinese equity markets chalked up a gain north of 4.8 per cent in 2Q17, while South Korea and Taiwan continued their stellar run from the first quarter. The emerging markets of Brazil and Russia underperformed in 2Q17, posting losses on the back of unfavourable political developments and decline in commodity prices.

Asian equity markets have once again outperformed their developed counterparts in the second quarter, helping to add to a rather strong 1H17 return. We continue to see improvements in economic data as well as aggregate corporate earnings estimates, and reiterate our preference for the Asia ex Japan region as compared to the Western developed markets.

Additionally, we have turned neutral on Europe, and may be reviewing our star ratings for the US market in the near-future. To read more about activities in the market, log on to www. fundsupermart.com