European Woes Drag Markets Down

Equity markets were down across the board over the week ended 11 May 2012, as global equities lost -1.58% for the week as European worries re-emerged. Political turmoil in the world's largest economy saw investors fret over the future of the Euro and the impending battles on the continent. Europe and Japan posted losses of -1.00% and -3.31% respectively, with the Nikkei 225 being dragged down by poor earnings reports. A weak jobs report in the US and disclosure of losses by JP Morgan Chase Bank (which some linked to a London trader dubbed 'Lord Voldemort') saw US equities end the week -0.63% lower.

Emerging Markets bore the brunt of the equity retreat, losing -3.64%, with the BRIC markets amongst the biggest losers. Brazil's Bovespa Index lost -2.96%, Russia gave up -1.73% and India shed -2.75%, while China posted losses of -5.71%. In Emerging Markets news, the twin engines of China & India posted shocking trade data and industrial production data respectively.

Asia ex Japan was the worst hit region for the week, dropping -4.31% as Northeast Asia dragged the index down. The Greater China region were amongst the week's biggest losers, as Hong Kong, Taiwan and China fell -4.87%, -3.85% and -5.71% respectively. Other sizeable declines came from Korea, Thailand and Singapore, which fell -4.22%, -3.27% and -3.58% respectively.

[All returns in SGD terms]

Investors may refer to Market Valuations as of 11 May 2012 for more details.

Europe: Political Turmoil Returns With A Vengeance, Spain Takes Bankia

Uncertainty in the Greek political impasse continued to weigh on sentiment and equity markets as investors worried that the Greeks would default on their debt should the hard-left party come to rule, seek an exit from the Eurozone and return to the Drachma.

In Spain, the conversion of a EUR 4.5 billion loan saw the Spanish government take over troubled bank Bankia's parent, while mandating reforms in the banking industry. Spanish banks will now have to increase provisions to 30% from a previous 7% on property loans, which have come under scrutiny given the weakness in the country's real estate market. As a result, an additional EUR 30 billion worth of provisions is expected to be made, and would see banks raise their coverage of real estate loans to 45%, bringing provisions against real estate assets to EUR 137 billion.

Spanish sovereign yields rose over the week, with the 10 year debt rising to 6.007% while spreads between Spanish and German 10 year debt rose to over 3.657% in midweek, its highest point since the creation of the Eurozone. Given the continued worries in the market over the potential bailout of the Spanish banking sector, Spanish sovereign yields could continue its rise.

Greater China: Trade Data Sinks Markets

In China, trade data shocked the markets and prompted further easing which the government duly provided over the weeked by cutting the Reserve Requirement Ratio (RRR) for Chinese lenders. The trade figures for April shocked markets as both exports and imports growth disappointed markets. Exports growth slowed to 4.9% year-on-year, which is a slowdown from the 8.9% year-on-year growth in March, and also came in below estimates of 8.5%. Imports growth slowed to just 0.3% year-on-year in April, missing estimates of 10.9% year-on-year growth significantly, as well as slowing from the 5.3% year-on-year growth in the previous month. Weak demand has led net crude oil imports to record a year-on-year decline; in addition, imports were also dragged down by weakness in commodity prices. At the same time, inflationary pressures remain relatively low, with the consumer price index (CPI) gaining 3.4% year-on-year, which is a moderate decline from the 3.6% increase in March. The stable figure confirms that China’s inflation is under control. Easing inflation concerns along with weak economic figures have prompted the central bank to further loosen monetary policy as it cut the RRR by 50bps, effective May 18 2012.

Meanwhile in Taiwan, exports in April dropped -6.4% year-on-year, missing estimates of a -3.1% drop. The figure was dragged down by weak external demand, with relatively large declines in exports to China and US. Exports to China, Taiwan’s main trading partner, dropped -9.3% year-on-year and exports to US dropped -16.3% year-on-year. Weak export figures will put a drag on the overall economy. We have seen a slower-than-expected recovery in exports, which leads us to believe that a recovery in exports growth may come at the earliest in the second half of 2012. At the same time, inflation inched higher in April, increasing from 1.21% in March to 1.44% in April. This creates a dilemma for the central bank, impeding its flexibility in loosening monetary policy to support the economy as inflation issues persist.

South East Asia: Slowing Growth

In Malaysia, Industrial Production Index (IPI) in March grew at 0.6% year-on-year, slower than the consensus estimates of 3.3%. IPI for 1Q 2012 expanded by 2.9% year-on-year mainly supported by the higher manufacturing and electricity production. Mining output remains weaker and contracted -4.1% in March as compared with the same period last year. While the near-term economic outlook is clouded by European debt crisis, we believe that the moderate growth in consumer spending and private investment is likely to cushion the slower production growth.

Indonesia 1Q 2012 economic growth measured 6.3% on a year-on-year basis, fairly matching consensus estimates despite coming in lower than the previous period's rate of 6.49%. It was mainly supported by rising investment and steady consumption demand which recorded 9.9% and 4.9% growth respectively. Rising disposable income among the mass and relatively loose credit financing environment are the forces behind robust economic growth. In addition, Bank Indonesia announced that it will raise the rates on central bank bills and term deposits to absorb excess liquidity in the financial system while holding its benchmark interest rate unchanged at 5.75%, a level unchanged for three straight meetings. However, a rising inflation rate (4.5% in April and 3.97% in March) for two consecutive months over uncertainty of a fuel price hike might tilt Bank Indonesia towards a monetary tightening stance sooner as compared to its regional peers.