Equity Markets Turn Cautious
Equity markets under our coverage ended the week of 24 August 2012 mostly in slightly negative territory with all regional markets closing lower while most of the single country markets followed suit as investors awaited with caution key meetings in the form of the central bankers meeting at Jackson Hole in the week ahead followed by the European Central Bank's policy meeting the next. Asia ex Japan and Global Emerging Markets led regional markets lower to close down -0.9%, with the US and European bourses ending the week slightly better at -0.8% and -0.4% respectively.
Asia ex Japan was hampered by the poor performances of North Asian countries such as Korea, Hong Kong and China (HSML 100), which posted respective losses of -1.7%, -1.5% and -1.3% as poor data provided a drag on their respective bourses.
Global Emerging Markets were likewise hampered by the poor performances of North Asian countries as mentioned above (less Hong Kong), with other detractors coming in the form of Brazil (-1.5%) and Indonesia (-0.6%).
Only 4 single country markets managed to post positive returns in SGD terms. Thailand (1.8%), Russia (1.1%), India (0.8%) and Malaysia (0.6%) were the sole markets to end the week in positive territory.
[All returns in SGD terms]
Investors may refer to Market Valuations as of 24 August 2012 for more details.
Europe: Eurozone Data Muted, German GDP Worrisome
Advance Purchasing Managers Indices in the Eurozone tracked extremely marginally higher for the month of August.The composite PMI for the Eurozone came in slightly above expectations of a 46.5 reading, which was July's final reading, to register a reading of 46.6. Manufacturing PMI rose higher to register 45.3, beating consensus estimates of 44.2 and July's 44.0 reading. Services PMI on the contrary to the other PMIs fell, declining to 47.5 from 47.9 in July, missing estimates of a reading of 47.7. A reading above 50 indicates expansion, while a reading below 50 signals contraction.
The advanced reading of Consumer confidence pointed to consumers being increasingly cautious, with the reading sliding to -24.6, down further from -21.5 and missed estimates of a fall to -22.0. The reading is the lowest since July 2009 and could spell weakness in consumer spending moving forward. Given that consumer spending in the Eurozone has been relatively resilient as compared to the other components of the economy, further slides in consumer confidence and a deterioration in consumer spending could see us revising our estimates of a mild recession in the Eurozone downwards, pointing to a deeper recession.
Germany's 2Q 2012 GDP rose by 0.3% on a quarter-on-quarter basis, coming in in-line with consensus estimates while slowing from the previous quarter's growth rate of 0.5%. On a year-on-year basis, GDP grew by 1.0%, matching estimates whilst slowing from the 1.2% seen in 1Q 2012. The economic expansion was driven by exports and household spending, with the former growing by 2.5% on a quarter-on-quarter basis while the latter rose by 0.4%. The biggest detractors from economic growth were falls in investment spending which fell -0.9% and construction investment which slid by -0.3%. While 2Q 2012 GDP matched estimates, we believe that the downside risks to the economies of Europe's core have increased as spillover effects from the sovereign debt crisis begin to make their presence increasingly felt in the engines of Eurozone economic growth.
Greater China: More Disappointment From The Global Slowdown
In China, the HSBC Flash Purchasing Managers’ Index (PMI) fell to 47.8 points in August, where a figure below 50 indicates a contraction in the industry. The preliminary figure for August indicates a tenth consecutive month of contraction; not only was the figure worse than the 49.3 points we saw in July, it was also the lowest level seen since November 2011. The figure indicates continued weakness in the economy which we expect will persist for longer especially as the external economic environment has yet to show signs of turning around.
Meanwhile, inflation in Hong Kong slowed from 3.7% in June to 1.6% in July, the lowest level since December 2009. The significant slowdown in the headline figure was reflective of distortions coming from the government’s one-off relief measures. Excluding these effects, the inflation rate in July was at 4.2%, which was still lower than the 4.5% seen in June. The inflationary trend in Hong Kong has been lowering as weak demand, especially coming from China, has been putting downwards pressure on prices. We expect inflation to continue to head lower in the face of weak overall demand.
Taiwanese export orders continued to paint a picture of a poor external environment. Export orders contracted -4.39% year-on-year in July, marking the fifth consecutive month of decline. The figure highlighted a significant deterioration from the -2.62% decline in June, it was also worse than market estimates of a -2.98% contraction. A weakening economic environment in China and Europe has put a drag on Taiwanese exports, as export orders from the two destinations declined -5.5% and -4.7% year-on-year respectively. With Taiwan being an export-oriented economy, as external demand remains weak, we expect the economy to grow at a relatively weak pace.
GEMs: Food Costs Bite
Russian retail sales grew only 5.1% year-on-year in July, declining from June’s 6.9% year-on-year growth and missing estimates of a 6.2% rate. The growth rate was the slowest since January 2011. Food sales was the main factor weighing on Russia’s retail sales growth, growing only 1.3% % year-on-year in July, declining markedly from 4% in June. Weakness in food sales growth can be attributed to rising food inflation as food prices around the globe have surged in recent months.
In India, a similar effect was seen in the declining consumer price index (CPI). The CPI for the month of July came at 9.86% year-on-year as compared against the previous month's reading of 9.93%. This was the second consecutive decline in the CPI, with the latest level marking the lowest level in the past 4 months. The inflation rate for urban and rural areas for July 2012 were at 10.10% and 9.76% on a year-on-year basis respectively as compared to respective readings of 10.44% and 9.65% for the previous month. The prices of vegetables recorded the highest increase of 27.33% year-on-year followed by Oil & Fats and Pulses. Even though the CPI has slowed slightly in the last 2 months, it is still close to 10% and does not provide sufficient room for the central bank to focus on deteriorating economic growth.