A Look at Local Markets
Clear winners and losers emerged in Asia-Pacific during the first half of 2014, as the shift to risk-on lifted markets in India and Taiwan while leaving others like Japan and China in the dust.
In India, the Bharatiya Janata Party-led National Democratic Alliance swept Narendra Modi into power after May elections. After a weak start to the quarter before the results of the Lok Sabha (lower parliamentary house) elections, equity markets cheered the election of Mr. Modi and his slogan “good times ahead,” jumping 13.52% in the quarter (see Figure below). That follows a respectable rise in Q1, for a first-half increase of more than 20%. Small-cap stocks in India climbed a dizzying 55.75% in the first half of 2014.
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Selection of equity benchmark performance
There’s likely some irrational exuberance at play here. Mr. Modi, after his impressive election win, now has to govern. His first budget, presented in July, disappointed. Tax revenues are projected to grow by 20%. That’s an incredible number because nominal GDP growth will likely come in under 14% (5% to 6% real growth plus 8% inflation) and because India reached 45% of the annual deficit in the first quarter of the fiscal year. The government also needs to demonstrate it can also bring greater discipline to expenditures.
Taiwan, meanwhile, looks steadier (if also more subdued). Stocks there rose 8.21% in Q2 as foreign investors crowded into the market, in part to tap Apple’s shift to using Taiwan Semiconductor Manufacturing Co. to produce its chips, a blow to Korea’s Samsung. Taiwan’s export orders grew 10.6% in June, well past forecasts, driven by electronics export annual growth of 17%, according to the Wall Street Journal. Stocks rose 11.78% in the six months ended June 30.
On the other end of the spectrum, Japanese stocks lost 6.07% as of midyear, despite a modest improvement of 2.39% in the second quarter. Economic data continued to be mixed, with bright spots in Q1 clouded over by the fact that capital and consumer spending were boosted by an impending tax hike. So far the data bear out a contraction. Retail sales fell in April and May, as did real household spending. In line with those numbers, the PMI composite output index fell to a quarterly average of 48.5, below the 50 mark, from a robust 53 in Q1.
China A shares also lost ground in the first half of the year, down 5.01%, after a 1.93% increase in Q2. We expect China’s economy to slow over the next five years to annual growth of 4% to 5%. Investment as a share of GDP is still high versus history, and credit is still rising relative to nominal output. Both trends are unsustainable, and an adjustment will bring about lower growth.
Korean stocks essentially broke even in the first half of the year and rose 1.13% in Q2. The Korean market is particularly susceptible to global growth trends because of the concentration of exporters in the KOSPI index, so the sluggish growth of global trade volume has weighed down stocks in 2014. Also, a growing surplus current account balance and inflows from investors have pushed the won to appreciate, dragging down returns.
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