Asian Diary - October 2015

Read Nick’s monthly column to get the latest perspectives on what we are seeing on the ground in Asia, with observations from the team’s travels around the region.

Equities rallied in October after the Fed announced in late September that there would be no immediate rate rise, and as data coming out of China stabilised. The MSCI AC Asia ex Japan index rose 8.0% in USD terms, just outpacing the MSCI AC World Index (7.9%) and MSCI Emerging Markets index (7.1%). All Asia ex Japan currencies, with the exception of the Philippine peso, rose versus the USD.

After a period of extreme outflow across the industry, emerging market / Asia ex Japan strategies saw inflows during the month of October. There was a clear rotation in favour of countries that had recently suffered underperformance. Indonesia was the top performing market (+15.8%) helped by a 7% appreciation of the rupiah. Korea rose +11.3% on better consumption data and strong performance from Samsung Electronics. Meanwhile, China rose +9.1%, as cheap valuations and signs of government support, including a rate cut towards the end of the month, brought investors back to the market. India was the worst performing market in Asia (+1.6%) following its more defensive outperformance in Q3.

In other news, China held its 5th Plenum in late October. The Plenum is attended by the Communist Party Central Committee, a body made up of the party’s top leaders, and sets future policy direction and goals. The announcements were generally positive, though light on detail, so as always execution remains the key risk. Headlines included a re-commitment to the goal of doubling per capita income between 2010 and 2020. That implies an annual growth rate from here of precisely 6.53%, which may prove ambitious. However, with the 100th anniversary of the Chinese Communist Party coming at the end of this 5-year plan in 2021, it is clear that President Xi’s Chinese Dream of transforming the country into a ‘moderately prosperous society’ remains a central goal. Other headlines included the move to a two-child policy, something that is important to China’s future, but unlikely to have much near term impact, as well as a focus on social welfare, the environment, productivity/ innovation and further financial reforms. Nothing here changes our outlook for the Chinese economy.

October was a busy month for travel with team members visiting China, Malaysia, Indonesia, the Philippines and Thailand.

The Philippines remains one of the strongest macro stories in Asia. A combination of overseas foreign worker (OFW) remittances and the business process outsourcing (BPO) industry growing in the high teens¹ has led to a virtuous cycle with income growth leading to consumption and property sales, which in turn leads to more private sector investment and employment creation. As well as seeing companies in Manila, some of the team made a visit to the city of Iloilo on Panay Island, several hundred kilometres south of the capital. The visit provided evidence of how the BPO and OFW remittance growth are helping transform provincial economies across the Philippines. At the low end of the scale OFW remittances are allowing low income people access to finance in order to buy entry level homes such as those shown in the Figure 1, which have 30-40 square metres of space and sell for approximately US$25,000. In the mid-end, OFWs such as nurses and seafarers can buy 50-60 square meter units such as those shown in Figure 2 for around US$60,000. We also saw evidence of new shopping malls and business parks being built helping to sustain growth.

Figure 1

Source: T. Rowe Price

Figure 2

Source: T. Rowe Price

One of the few areas of disappointment has been the pace of infrastructure development in the country in recent years. This was to be a focus of the current government, but a crackdown on corruption and resultant tightening of the regulatory environment has slowed the pace of project approval.

Another risk is the election due in May 2016. It is still too early to know which candidate might win, or to understand their detailed policy proposals, but all of them seem focused on infrastructure, which should be a good thing for the Philippines over the next few years.

Despite this excitement, the Philippines is a small stock market, and as a result trades at high multiples. Our preferred sectors include Financials and the Consumer.

¹Information Technology and Business Process Association of the Philippines (IBPAP)

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