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2014

Macro comment on Asia – August 2014

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  The macro situation of China is improving month after month. The GDP growth for the second quarter reached 7.5% yoy, up from 7.4% in 1Q, and increased by 2.0% QoQ in 2Q, up from 1.4% QoQ in 1Q. The micro stimulus of the economy and the recent relaxation of home purchase restrictions in a number of Tier 2 and Tier 3 cities are clearly bearing fruits. This uptrend should carry on in the third quarter, especially as the largest banks of China are now offering discounts to the PBoC base rate to first-time mortgage applicants. Moreover, the latest July HSBC/Markit PMI index was 51.7, up from 50.7 in June and a market expectation of 51.0. Looking at sub-indices, the improvement was across the board, from production output to new orders, to export orders and to employment. This was a clear support for the Chinese equity market.

In Malaysia, the Central bank raised its policy rate by 25bp to 3.25% on 10 July. The hike was in line with expectation, making Malaysia the first in Southeast Asia to raise its benchmark rate this year. In Indonesia, the Central bank kept its policy rate on hold at 7.5%, with CPI in June moderating to 6.7% yoy down from 7.3% yoy in prior month and lower than consensus estimate of 6.8% yoy. The biggest event in the month was clearly the presidential election. The official results confirmed Jokowi as the next president. The team consisting of Jokowi-Kalla won with 53% to 47%, over their Prabowo-Hatta rivals. While political uncertainty will persist for at least another month with Prabowo’s rejection of the election result, general perception is that the result will not be overturned by the Constitutional Court. Capital markets have been welcoming his presidency, expecting him to send the right signals on addressing supply side issues, i.e. capping fuel subsidies and making infrastructure a priority. The economic risk is a renewed inflation spike from a domestic fuel price increase. Bank Indonesia’s response to this may be a 25bp policy rate hike to 7.75% both for countering second round inflation effects and for taming the current account deficit.

In South Korea, the Central bank kept its policy rate on hold at 2.5%. GDP figures showed a sharp slowdown of the economy in the second quarter with growth slowing to just 0.6% QoQ, down from 0.9% in Q1. The slowdown was mainly due to a slump in private consumption which was held back by a fall in consumer sentiment following the Sewol ferry disaster in April. The Korean government released a stimulus package aimed at addressing both the causes of the current weakness in the economy, as well as tackling some of the structural constraints on growth. The package includes US$11.4bn (equivalent to 0.9% of GDP) in extra fiscal spending to boost consumer sentiment by providing direct income support to poor households as well as tax incentives to encourage companies to increase wages. The second part of the stimulus package is US$21bn (1.9% of GDP) in loans and other financial support, aimed primarily at small struggling companies. The third component involves a relaxation of mortgage lending restrictions, and is aimed at boosting the country’s property sector which has acted as a drag on the overall economy.

Indian equities continued to remain in a consolidation mode through the month of July ‘14. The mainline large cap NIFTY index rose 0.10% in USD terms in the last month while the CNX Midcap index declined 3.63%. The much awaited Union Budget was announced on July 10, 2014. While there were no big bang announcements in the budget, directionally, thrust has been placed on fiscal consolidation, divestments, service tax revenues, subsidy control, manufacturing and incentivizing asset creation. Trends in the June’14 quarter earnings season now underway have been mixed. In Thailand the peaceful military coup and the macroeconomic decisions made since then by the junta boosted consumer confidence. Seldom have we seen a military coup being welcome by the population like it has been in Thailand. GDP forecasts as well as most macro numbers havebeen mixed.

In Thailand the peaceful military coup and the macroeconomic decisions made since then by the junta boosted consumer confidence. Seldom have we seen a military coup being welcome by the population like it has been in Thailand. GDP forecasts as well as most macro numbers have beenrevised upwards for 2015 (the year 2014 is a write-off anyway). The market performed very well so far this year, to the point that we need to be cautious on this market.

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