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Asia ETF Roundup (Market) – September 2019

U.S., ECB and Asia EM markets cut rates; China removed QFII/RQFII quota for foreign investments

Jackie Choy, CFA 10/10/19

For the latest ETF industry news, please refer to our “Asia ETF Roundup (Industry) - September 2019”.

Major Markets Performance

Major global equity markets generally rebounded in September in spite of geopolitical tension and signs that growth may be slowing. U.S.-China trade tensions continued to grab headlines and the U.K. Supreme Court ruled that the Prime Minister’s decision to suspend the Parliament for five weeks was unlawful. The S&P 500 and the FTSE 100 gained 1.7% and 2.8%, respectively. China’s equity markets were up slightly (HSCEI +1.2%; CSI 300 +0.4%; Shanghai Composite +0.7%). Emerging markets’ performance was mixed. Pakistan was among the strongest performers, surging 8.6% in September after posting an 8.4% decline in August (as measured by their respective MSCI indices in U.S. dollar terms).

The U.S. dollar appreciated slightly in September, rising 0.5% (as measured by the ICE Spot Index). Central banks around the world generally remained in rate-cutting mode. The U.S. Federal Reserve and the European Central Bank cut rates, as did a number of central banks in the emerging markets.  Asian currencies performance was mixed against the greenback. The Chinese Yuan was almost unchanged against the U.S. dollar (+0.1%), putting its year-to-date depreciation against the U.S. dollar at 3.8%.

Precious metals’ prices retreated in September after three consecutive months of gains. In September, gold, silver and platinum prices dropped 3%-6%.

Economic and Market News

U.S., Europe, Russia, Turkey, Vietnam, Brazil, Hong Kong, China, Indonesia and Philippines Cut Rates

  • U.S. Cuts Rates by 25bps –On 18 September 2019,the U.S. Federal Reserve announced it would cut the target range for the federal funds rate by 25bps to 1.75% to 2.00%. Federal Reserve Chairman Powell stated, “we took this step to help keep the U.S. economy strong in the face of some notable developments and provide insurance against ongoing risks”. The Fed last cut interest rates in July 2019.
  • Europe Cuts Rates by 10bps, Resumes Asset Purchase Programme – The European Central Bank decided on 12 September 2019 to cut the deposit facility rate by 10bps to -0.50%. This is the first time the Bank has cut interest rates since 2016. The Bank also decided to resume its Asset Purchase Programme on 1 November 2019 at a monthly flow of €20 billion. It will also introduce a two-tier reserve renumeration system in which part of excess reserves held by banks will be exempt from negative deposit facility rate.
  • Russia Cuts Rates by 25bps – The Central Bank of the Russian Federation decided on 6 September 2019 to cut key rate by 25bps to 7.00%. This is the third time the Bank cut its key rate this year.
  • Turkey Cuts Rates by 325bps – The Central Bank of the Republic of Turkey decided on 12 September 2019 to cut its policy rate by 325bps to 16.75%. The Bank last cut its policy rate by 425bps in July 2019.
  • Vietnam Cuts Rates by 25bps – The State Bank of Vietnam decided on 13 September 2019 to cut key interest rates by 25bps to 6.00%. This is the first time the Bank cut its key interest rates since 2017.
  • Brazil Cuts Rates by 50bps – The Central Bank of Brazil decided on 18 September 2019 to cut on its Selic rates by 50bps to 5.50%. This is the second time the Bank cut interest rates this year.
  • Hong Kong Cuts Rates by 25bps –The Hong Kong Monetary Authority decided on 19 September 2019 to cut its base rate by 25bps to 2.25%, following the U.S. rate cut. This is the second time the Monetary Authority cut interest rates this year.
  • China Cuts Rates by 5bps, RRR by 50bps – The People’s Bank of China decided on 19 September 2019 to cut its loan prime rate by 5bps to 4.20%. At the same time, the PBOC cut the reserve requirement ratio by 50bps, putting the RRR for large banks at 13.0%.
  • Indonesia Cuts Rates by 25 bps – Bank Indonesia decided on 19 September 2019 to cut BI 7-day (reverse) repo rate by 25bps to 5.25%. This is the third consecutive month that the Bank cut its reverse repo rate.
  • Philippines Cuts Rates by 25bps – The central bank of Philippines decided on 26 September 2019 to cut its overnight reverse repurchase rate by 25bps to 4.00%. This is the third time the bank has cut interest rates this year.

QFII/RQFII Investment Quota Abolished, RQFII Jurisdictional Limit Removed

The State Administration of Foreign Exchange (SAFE) announced on 10 September 2019 it would remove investment quota for inbound investment schemes QFII and RQFII. The two inbound investment schemes allowed overseas qualified investors to access onshore listed A-shares and bonds in USD and via offshore RMB accounts respectively, and corresponding investment quota of USD 50 to 800 million per firm and a combined quota of RMB 270 billion for each investment scheme. SAFE also removed the jurisdictional limit for the RQFII scheme, which only allowed 19 countries or regions before the limit removal. SAFE stated that “The abolition of the investment quota restriction for qualified foreign investors is a major reform of the State Administration of Foreign Exchange to deepen the reform and opening up of the financial market”.

China Economic Data: Inflation remained at 2.8% in August; Caixin/Markit PMI rose to 51.4, Official PMI edged up to 49.8 in September

  • China’s inflation rate remained at 2.8% in August, even with July’s reading.
  • China’s Caixin/Markit PMI remained above the 50-point level and registered at 51.4 in September. August’s reading was 50.4. The official PMI also rose to 49.8 in September, up from August’s reading of 49.5.
About Author Jackie Choy, CFA

Jackie Choy, CFA  

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