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Asia ETF Roundup (Market) –December 2017 and January 2018

Brazil, Russia Cut Rates; U.S., Hong Kong, Malaysia and Pakistan Raise Rates; China’s 2017 GDP Growth comes in at 6.9%.

Jackie Choy, CFA 08/02/18

For the latest ETF industry news, please refer to our “Asia ETF Roundup (Industry) – December 2017 and January 2018”.

Major Markets Performance
2017 was a good year for equity investors as most major markets posted double-digit gains (MSCI World Index returned 22.4%; MSCI Emerging Markets Index returned 37.3%). As expressed in U.S. dollar terms gains were aided in part by the depreciation of the greenback (the ICE spot index declined 10.2% in 2017). In spite of the geopolitical risks underscored by missile tests in the Korean Peninsula and Spain’s Catalonia crisis, the Korean market surged 21.8% and the euro appreciated by 13.8% against the U.S. dollar in 2017. In the U.S., the senate approved tax reforms at the end of 2017 and the S&P 500 hit fresh all-time highs, surging 19.4% for the year. Elsewhere in Asia, China held the 19th National Congress in October where President Xi Jinping was re-elected as the party’s leader and will hold office for another five years. The Chinese markets gained 7-25% in 2017 (CSI 300 +21.8%; Shanghai Composite +6.6%; HSCEI +24.6%). In Hong Kong, the Hang Seng Index was one of the top performers in the region, surging 36.0%. Shares of tech giant Tencent (+114.5% in 2017) contributed a large portion of the HK market’s 2017 gains.

Emerging- and frontier-markets--with the exceptions of Pakistan (-28.0%) and Russia (+0.3%)-- experienced strong gains for the year, ranging from 21-61% (proxied by the respective MSCI country indices in U.S. dollar terms). The Vietnamese market saw a staggering 61.2% gain in 2017. The country has a pipeline of state-owned enterprises that will be privatized in 2018. On the other end of the spectrum, Pakistan’s stock market experienced a decline of 28.0%, as the nation grappled with political uncertainty.

The U.S dollar changed course in 2017, weakening by 10.2% (as measured by the ICE Spot Index). Emerging-markets’ currencies performance against the greenback were mixed. The Malaysia Ringgit and the Thai Baht appreciated 10.8% and 9.9%, respectively, against the U.S. dollar. The Indonesia Rupiah and Philippine Peso depreciated 0.7% and 0.4%, respectively against the greenback. Meanwhile, the Renminbi turned around in 2017, appreciating 6.7% against the U.S. dollar, returning to levels last seen in early 2016.

Precious metals’ performance was positive in 2017. Gold was the strongest of the bunch. The price of the yellow metal rose 12.7% for the year.  Silver and platinum prices increased by 3.8% and 3.0%, respectively. The price of oil continued its positive trajectory in 2017, climbing another 12.5% after rising 45% in 2016.

Global stock markets generally carried 2017’s strong momentum into 2018. Markets in Hong Kong (Hang Seng Index +9.9%), China (HSCEI +15.8%; CSI 300 +6.1%; Shanghai Composite +5.3%) and the U.S. (+5.8%) had strong showings in January. Emerging- and frontier-markets generally ended January with gains, ranging from 3-17%. Among this cohort’s top performers were the Brazilian equity market, which rose 16.7%; stocks in Vietnam continued its strong performance from 2017 gaining 10.3% in the month of January; and the Pakistan market turned around with a gain of 8.3% (as measured by the respective MSCI indices in U.S. dollar terms).

In the currency market, the U.S. dollar continued to decline in January, weakening by 2.9% (as measured by the ICE Spot Index). The performance of the Renminbi was particularly strong in January, as it rose 3.5% against the U.S. dollar.

Prices of the precious metals continued their uptrend in the month of January. Gold, silver and platinum prices registered monthly gains of 4.2%, 2.2% and 8.4%, respectively.

Economic and Market News

Brazil, Russia Cuts Rates; U.S., Hong Kong, Pakistan, Malaysia Hikes Rates

  • Brazil Cuts Rates by 50 bps - On 7 December 2017, the Brazilian central bank cut rates by 50 bps to 7.0%. The bank reduced rates by a total of 6.75 percentage points in 2017.
  • U.S. Hikes Rates by 25bps – On 13 December 2017, the U.S. Fed announced it would raise the target federal fund rate by 25 bps to 1.25%-1.50%. Subsequently, at the 30-31 January 2018 FOMC meeting, the Fed held rates unchanged, but indicated a stronger inflation outlook stating that, “Inflation on a 12‑month basis is expected to move up this year and to stabilize around the Committee's 2 percent objective over the medium term.”
  • Hong Kong Hikes Rates by 25bps – On 14 December 2017, the Hong Kong Monetary Authority raised its base rate by 25bps to 1.75% in response to the Fed’s rate hike.  
  • Russia Cuts Rates by 50 bps – On 15 December 2017,the Russian central bank cut the key rate by 50 bps to 7.75%. The bank stated that it will continue to gradually shift monetary policy to a neutral stance from a moderately tight stance. The bank cut rates by a total of 2.25 percentage points in 2017.
  • Malaysia Hikes Rates by 25bps – On 25 January 2018,Bank Negara Malaysia raised its interest rate by 25 bps to 3.25%. The rate hike was aimed to “normalize the degree of monetary accommodation” and “prevent the buildup of risks that could arise from interest rates being too low for a prolonged period of time."
  • Pakistan Hikes Rates by 25bps – On 26 January 2018, the State Bank of Pakistan raised its interest rates by 25 bps to 6.0%, mainly to “preempt overheating of the economy and inflation breaching its target rate of 6%”.


Sovereign Credit Rating Changes
Credit rating agencies made a number of sovereign credit rating changes over the past two months:

  • Indonesia – Fitch upgraded Indonesia’s Long-Term Issuer Default Ratings by one notch to BBB.
  • Portugal – Fitch upgraded Portugal’s Long-Term Issuer Default Ratings by two notches to BBB, i.e. to investment grade.
  • Spain - Fitch upgraded Spain’s Long-Term Issuer Default Ratings by one notch to A-.
  • Brazil - S&P lowered Brazil’s long-term sovereign credit rating by one notch to BB-.
  • Greece - S&P upgraded Greece’s long-term sovereign credit rating by one notch to B.


Chinese Economic Data: 2017 GDP Growth clocked in at 6.9%; Inflationat 1.8% in December; Caixin/Markit PMI at 51.5 in December and January,Official PMI Registers at 51.3 in January

  • China’s 2017 GDP growth registered at 6.9 % (and 6.8% YoY in Q4 2017). This figure surpassed China’s 2017 GDP growth target of “around 6.5%” and 2016’s figure of 6.7%.
  • China’s inflation rate was little changed from October’s reading of 1.9% to 1.7% for November and 1.8% for December.
  • China’s official PMI readings from December 2017 and January 2018 remained above the 50-point level, registering at 51.6 and 51.3, respectively. This compares to November’s reading of 51.8. Meanwhile, the Caixin/Markit Purchasing Managers' Index increased to 51.5 in both December 2017 and January 2018, both higher than November’s level of 50.8.
About Author Jackie Choy, CFA

Jackie Choy, CFA  

Jackie Choy, CFA is the Director of ETF Research for Morningstar Investment Management Asia