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TOP PERFORMING MARKETS IN 2005 |
Most equity markets had a blast in 2005. All of the more popular Asian markets enjoyed positive returns. Strong economic growth in some of the Asian countries, favourable earnings growth expectations and positive investor sentiment helped in propelling market performance. While the MSCI World Index rose 10.8% in 2005, the MSCI Asia ex-Japan index rose 21.5% in 2005 (all returns in SGD terms). This is despite worries over skyrocketing oil prices, the impact of future interest rate hikes and the possibility of a bird flu epidemic in Asia. Below are the performances of the more popular markets in Singapore dollar terms (please note that all returns are expressed in SGD terms, without dividends reinvested).
Table 1: Market Performance Scoreboard
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Market |
Index |
2005 Return |
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South Korea |
KOSPI |
61.6% |
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India |
SENSEX |
39.8% |
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Emerging Markets |
MSCI Emerging Markets |
32.7% |
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Japan |
Nikkei 225 |
24.4% |
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China |
HSMLCI |
21.9% |
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Asia ex-Japan |
MSCI Asia ex-Japan |
21.5% |
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Singapore |
STI |
13.6% |
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Indonesia |
JCI |
12.1% |
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Europe |
MSCI Europe |
9.3% |
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Hong Kong |
HSI |
6.7% |
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Taiwan |
TWSE |
5.2% |
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US |
S&P 500 |
4.9% |
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Technology |
NASDAQ 100 |
3.3% |
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Thailand |
SET |
3.3% |
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Malaysia |
KLCI |
1.5% |
Source: Bloomberg, Fundsupermart Compilations
All returns are expressed in SGD terms without dividends reinvested
From table 1, we observe that markets that led in terms of performance include South Korea (KOSPI), India (SENSEX), Emerging Markets (MSCI Emerging Markets) and Japan (Nikkei 225). The South Korean market delivered the strongest market performance with a return of 61.6% (SGD terms, without dividends reinvested) in 2005. For these markets, strong and positive economic indicators have paved the way for positive investor sentiment and thus strong market performance. The worst performing markets or sectors include Technology (NASDAQ 100), Thailand (SET index) and Malaysia (KLCI). Although the performances of these markets were lackluster in comparison to the others, they still stayed above water in 2005 with returns ranging from 1.5% to 3.3%.
In this article, we would be highlighting some of the reasons why the South Korea, India, Emerging market and Japan markets performed exceptionally well. More importantly, we will also state our outlook for these best performing markets. Lastly, we will also touch on the worst performing markets in 2005.
South Korea (KOSPI up 61.6%)
For South Korea, there was a slew of positive data regarding the Korean economy, including a recovery in domestic consumption, a marked pickup in exports growth and strong overall economic growth. The positive economic outlook is reflected in economic growth estimates as the Bank of Korea (BOK) expects the economy to grow by 3.9% in 2005 and 5% in 2006. In response to fears of inflationary pressure seeping into the South Korean economy, the government revised their benchmark interest rates up by 25 basis points to 3.75% in early December 2005. Despite this move, the KOSPI was up by 7.2% in December 2005, showing that investors have confidence in the domestic economy being able to absorb the impact of higher interest rates well. Another positive is that the market valuation still looks attractive. Even after the rally, estimated PE is 12.3X and 11.2X in 2005 and 2006, which is still low relative to other Asian markets. Going forward, we still think that the South Korean market looks attractive based on a three-year investment horizon and we have given the market a rating of 4 stars.
India (SENSEX up 39.8%)
The Indian equity market has rallied for the third consecutive year in 2005. The Indian equity market, represented by the SENSEX (Bombay Sensitive Index), was up 78%, 14.1% and 39.8% for 2003, 2004 and 2005 respectively. That amounts to a return of 184%, which means that the market is not far from tripling in 3 years. For the past three years, India has been enjoying healthy economic growth rates of 6.5% per annum (for periods ended March 2003, March 2004 and March 2005). There is also notable expansion in selected sectors including the technology and pharmaceutical sectors. Aside from the positive economic performance, Foreign Institutional Funds (FII) has been propelling the growth in equity markets as foreign investors have been pumping monies in the market for the past few years. In December 2005 alone, more than USD 2 billion was invested into the Indian equity market. The strong fund inflows did affect the volatility of the market to a certain extent, which is a factor that investors should take note of.
Unlike the South Korean market, we think that the positive expectations for the economy and equities have been largely priced into the market. Earnings growth (15.9% and 8.2% for fiscal year ending March 2007 and March 2008) and economic potential for the Indian market remain strong. However, the market is currently trading at a premium to average valuations and historical levels. As at end December 2005, estimated PE is at 19.4X and 16.7X for 2005 and 2006 respectively (fiscal year ending March 2006 and March 2007). At this range, the estimated PE is higher than the average PE of about 15X in the past 8 years and it is also at higher end of the historical PE range of 11X to 23X. Going forward, based on a three-year investment horizon, we are neutral on the Indian equity market and we have given a rating of 2.5 stars for this market. We recommend investors who have a large weighting in Indian equity funds to shift part of their exposure to other more attractively valued markets.
Emerging Market Equities (MSCI Emerging Market Index up 32.7%)
The emerging market region includes a wide spectrum of economies including Asia ex-Japan (55% of the index), Emerging Europe, Latin America, Middle East and South Africa. These markets have done exceptionally well in 2005. Within the region, Latin American equities delivered the strongest return (47.6%) with Emerging European equities coming in second (37.3%) and Asia ex-Japan equities coming in third (21.5%). Economic growth has been strong for the past two to three years and investors were generally quite positive about the emerging market regions in 2005. In addition to that, there was strong demand for raw materials (such as oil, copper, steel and iron) and that served as a boon to the resource rich emerging countries (including Brazil, Russia, Chile). Valuations (estimated PE) for the region still appear to look attractive at 13.9X and 12.6X for 2005 and 2006. Despite the rally in 2005, based on a three-year investment horizon, we remain positive on emerging market equities and have given a rating of 3.5 stars for the region.
Japan (Nikkei 225 Index up 24.4%)
Japanese equities (Nikkei 225) did very well last year with returns of 24.4% in SGD terms (refer to table 1). In the first half of 2005, the market was down 3.4% (in SGD terms). There was a myriad of factors that then led to optimism in the Japanese equity market. In September 2005, after the Liberal Democratic Party (LDP) led by PM Koizumi won the elections, market sentiment turned positive. One of the main reasons for the strong sentiment was the belief that the reforms led by LDP, which include the privatization of Japan’s postal savings system, were likely to channel more funds from the public sector to the private sector. Other positive factors buoying the Japanese market include the likelihood that deflation will end in early 2006, improvement in domestic and business expenditure, and strength in exports growth.
Despite these positive factors, we remain neutral in our view on the Japanese equity market. We think that it is unlikely that the end of deflation alone will lead the country to experience very strong economic growth. There are also several concerns facing the Japan market. This includes the likelihood of a dampening effect on consumer spending due to the anticipation of reductions in tax breaks. More importantly, estimated PE at 26.7X and 25.5X for 2005 and 2006 (fiscal year ending March 2006 and March 2007) is not as compelling in comparison to the previous years. Earnings growth is at 4.7% and 8.8% for 2005 and 2006, which is low compared to other regional markets. Going forward, based on a three-year investment horizon, we are maintaining a neutral view on the Japanese equity market and have given a rating of 2.5 stars for the market.
Next, let’s take a look at three of the worst performing markets for 2005 and our outlook for these markets.
Worst Performing Markets
The three worst performing markets/sectors for 2005 include Technology, Thailand and Malaysia. These markets returned 3.3%, 3.3% and 1.5% respectively. Out of these three markets, we have given a rating of 3.5 stars for the Technology sector and the Thailand market.
For the Technology sector, market sentiment was weak in the first and second quarter of 2005. In fact, for the first half of 2005, the NASDAQ 100 index was down by 4.8%. Investors were pessimistic about the growth of end user demand, which might affect the future demand for semiconductors. However, in the second half of 2005, we saw demand for consumer electronics picking up from both businesses and consumers. It was then that we saw some improvements in the performance of the Nasdaq 100 index, which rose by 8.1% in the second half of 2005. Going forward, we think that the uptrend in electronic demand is likely to continue and this would likely benefit technology companies in general. With that, based on a three-year investment horizon, we think that the technology sector looks attractive and we have given the sector a rating of 3.5 stars.
For Thailand, market performance was plagued by pessimistic sentiment. Investors were worried about the riots in the southern part of Thailand and the impact of a possible bird flu epidemic. In fact, the Thailand market was plagued by similar worries in the past two years and did not do well. For 2006, we think that there is a strong likelihood that the market will enjoy a turnaround. Valuations (PE ratio) are at 11.6X and 11.2X for 2005 and 2006, making the Thai market the most attractively valued among Asian single country markets. In contrast, earnings growth is not as strong relative to other Asian market at 4.1% for 2006 and 5.3% for 2007. Nonetheless, we think that there is limited downside potential for the market going forward as a large part of investors’ pessimism has already been priced into the market. In addition, we have placed a greater weight on valuations in our assessment for these markets. As such, based on the compelling valuations, and a three-year investment horizon, we think that the Thailand market looks attractive and we have given the sector a rating of 3.5 stars.
Conclusion
The best performing markets for 2005 are South Korea, India, Emerging markets and Japan, while the worst performing markets include Malaysia, Thailand and the Technology sector. Fears of high oil prices, worry over the possible spread of bird flu and concern over the impact of interest rate hikes on the market did not dampen market performances as all of the more popular equity markets delivered positive returns. There were very strong rallies in the South Korea and India markets, which returned 61.6% and 39.8% respectively. Despite the strong rallies in the various markets, particularly the Asian markets, we think that there are still investment opportunities to be found in 2006. We are still bullish on global equities in comparison to global bonds. On a regional basis, we think that Asia ex-Japan equities continue to look the most attractive. Within the single country Asian markets, we like the South Korea, China and Taiwan markets the most.
Mah Ching Cheng (Senior Analyst, Investment Representative) is part of the Research and Editorial team at Fundsupermart, a division of iFAST Financial Pte Ltd.
This article is not to be construed as an offer or solicitation for the subscription, purchase or sale of any fund. No investment decision should be taken without first viewing a fund's prospectus. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Past performance and any forecast is not necessarily indicative of the future or likely performance of the fund. The value of units and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. |
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Apr 2005 |
Asian Econ Growth To Stay Strong Into 2007
Developing economies in Asia will sustain robust growth into 2007 due to strong domestic demand, regional trade and a steady inflow of investment. |
MANILA (Dow Jones)--Asia's developing economies will sustain robust growth into 2007 as strong domestic demand, regional trade and a steady inflow of investment offset soaring oil prices and moderating growth in the U.S. and China, the Asian Development Bank said Wednesday.
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Forecast Raised to 6.5% from 6.2%
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In its latest Asian Development Outlook, the ADB said gross domestic product for Asia, excluding Japan, will grow by between 6.5% and 6.9% over the next three years.
For 2005, the ADB forecast average GDP growth of 6.5% for developing Asia, up from 6.2% it predicted last September. The upbeat forecast stems from momentum generated by the region last year, when GDP growth averaged 7.3%. That was the fastest growth rate since the 1997-1998 Asian financial crisis.
"The main message for developing Asia is that it will remain robust and resilient," the ADB's chief economist, Ifzal Ali, said at a news conference in Hong Kong.
Countries hit by a devastating tsunami in late December, for instance, will likely emerge quickly from the devastation, the ADB said. Asia, ex-Japan, will see a "brisk pace" of growth in intra-regional trade as the rest of developing Asia integrates further with China and increasingly with India.
The ADB forecast China's GDP will grow 8.5% in 2005, 8.7% next year and 8.9% in 2007 following growth of 9.5% in 2004, and it expects Asia's fastest-growing economy to achieve a soft landing as a result of government policies aimed at damping sectors viewed as overheated.
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Strong Foreign Investment Growth Expected
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Developing Asia, the ADB said in its report, "will remain a preferred investment location, provided that countries can enhance - or at least, keep - their competitive advantage," even as the pace of world economic expansion moderates over the next three years.
Foreign investment in the region is forecast to grow at an annual average of 30% over the three-year period. Domestic demand will be the main driver of the region's growth; moderating export growth its main damper.
"Domestic market conditions have become stronger over the past two years in most countries, providing some cushion against a potential deterioration in the external environment," the report said.
After growing an average 25.5% in 2004, the ADB expects developing Asia's exports to rise by 13.8% this year and by a more moderate 11% in 2006 and 2007.
Imports, meantime, are expected to rise 16.1% this year, 13.7% in 2006 and 12.2% in 2007. For 2006 and 2007, ADB forecast GDP growth in developing Asia of 6.6% and 6.9%, respectively. "Sustaining these rates will hinge on prudent macro management, and especially curbing some of the fiscal deficits that we're seeing in Southeast and South Asia," the ADB said.
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High Oil Prices A Risk |
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Tempering the upbeat message, the ADB warned of risks ahead.
Asian economies - and particularly those in Southeast Asia - are at risk from surging oil prices, epidemics and terror attacks, as well as still-large U.S. external imbalances and the impact of further increases in interest rates by the Federal Reserve.
"Tight oil market conditions are unlikely to ease during the forecast period (2005-2007) as there will be strong demand from the U.S. and China," Ali said. The current surge in oil prices is due to heavy speculative demand from a global financial market awash with liquidity and many countries building up strategic reserves.
However, as U.S. interest rates rise further, speculative demand for oil should abate, Ali added. ADB forecast that the price of Brent crude oil will average US$41 a barrel this year, up from US$38.30 last year and US$28.80 in 2003. It settled Tuesday at US$55.44 a barrel on the International Petroleum Exchange.
The Manila-based development bank has calculated that a $10 increase in oil prices in one year above its assumed price could shave around 0.8 percentage point off growth in Asia, excluding Japan.
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Intensifying Pressure On Asian Currencies |
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"The risk of global disruption stemming from large external imbalances in the U.S. has been on the radar for some time, but the timing and impact of the inevitable adjustment process remains uncertain," said the ADB, warning that "prior periods of adjustment and resultant weakness in the dollar have proved quite painful for the world economy."
While the U.S. continues to record large current account deficits, developing Asia is producing large current account surpluses. The imbalance is in part responsible for a buildup of foreign exchange reserves in developing Asia of $1.6 trillion in 2004, from $1.3 trillion in 2003.
A large proportion of these reserves has been plowed into U.S. debt securities. The ADB expects the U.S. dollar to maintain its current strength against the euro unless there is a sudden jolt to financial stability such as a surge in oil prices, higher inflation or an unwinding of Asian central banks' dollar assets.
But "the pressure on developing Asian currencies to appreciate will likely intensify, on the basis of Asia's relatively robust growth outlook and continuing capital inflows to the region," the bank said.
"Against this background, more proactive and concerted regional efforts will be needed to ensure an orderly adjustment among regional currencies in the face of the ongoing global currency movements."
4.4% Fed Rate In 2007
With oil prices high and the dollar weak against Asian currencies, U.S. monetary authorities may be forced to further increase interest rates significantly to curb inflation pressure, the ADB said.
The bank warned that a sharp acceleration in U.S. rates can exert significant influence on global financial markets and undermine investor appetite for taking risks.
It assumes the Federal Reserve will continue its measured pace of monetary tightening in the first half of 2005 and expects the federal funds rate will reach 3.75% by the end of 2005 from 2.75% currently and average 3.1% for the year.
But the Fed isn't likely to stop there due to growing inflation pressures. The ADB assumes an average federal funds target rate of 4.2% in 2006 and 4.4% in 2007. "Considerable upside risk remains, as inflation could significantly pick up on the closing output gap as well as rising input costs," it said. |
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China
China's central bank announced a policy change that could allow for the partial transfer of financial assets out of China effective December 1, 2004. Overseas Chinese nationals and those with Chinese inheritances will be allowed to convert their inheritances into foreign currencies and transfer the funds out of China. According to China's central bank, the changes were significant for protecting individual property rights and promoting the progress of the full convertibility of the reminbi. On another note, China and the ten-member Association of Southeast Asian Nations (ASEAN) signed an agreement at the ASEAN Summit in Laos to remove all tariffs by the end of 2010.
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Hong Kong
Hong Kong's third quarter GDP grew 7.2% on a year-on-year basis compared to 11.2% in the second quarter (the second quarter was up sharply from a low, SARS-induced base). On a quarter-on-quarter basis, growth was 1.9%. Given the high oil prices in the third quarter, Hong Kong's export of goods were somewhat dampened, and dipped by 0.9% from the second quarter. Export of services, however, grew by 7.6% quarter-on-quarter, mainly from tourism receipts. Inflation was up slightly, at +0.2% in October, which represents the fourth consecutive positive inflation number since July. The unemployment rate fell to 6.7% in October, its lowest level in almost three years, as the service and retail sectors added new workers to cope with the rising tourist arrivals.
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India
Pakistan and India's newly-elected government have resumed talks on Kashmir, demonstrating continued resolve to address the long-standing feud. India has underpinned the talks by initiating a partial troop withdrawal. Pakistan, for its part, has hinted that it might drop a long-standing demand for Kashmir to vote on its national allegiance. Despite these encouraging events, the outcome of the talks is far from certain, and violence in Kashmir continues; but the resumption of negotiations at least indicates a desire to maintain an open dialogue.
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Japan
The cleanup of Japan's banking system may have lurched forward in November with the announcement that Daiei1, a troubled retailer, well known for its large, unpaid bank debts, appeared closer to a financial bailout package. Market rumors had suggested that a government restructuring agency, or perhaps a large U.S. discount retailer, might step in to turn the company around. Now several Japanese companies have announced intentions to lead Daiei's bailout. If Daiei is restructured, it may end the difficulties of its lead creditor; the beleaguered Japanese bank will finally be able to clean up its books and write off Daiei-related losses.
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Korea
On November 12th, Korea moved against the grain for the second time this year: the Bank of Korea cut interest rates by 0.25%, even as the U.S. Federal Reserve raised rates by the same amount. Historically, the Bank of Korea has often followed the Fed's lead with respect to rates; but as domestic demand in Korea has fallen short of forecasts, the central bank has chosen to boost liquidity in an apparent bid to keep the economy from stalling out. Meanwhile, the inflationary backdrop remains muted. Consumer prices picked up briefly earlier this year, but now inflation has settled back to approximately 3%. The won's strength -- currently trading at a seven-year high relative to the U.S. dollar -- has helped keep a lid on domestic inflation.
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Taiwan
Taiwan's third quarter GDP increased by 5.3% year-on-year, versus a 7.9% increase during the second quarter (the second quarter growth statistic benefited from a low, SARS-induced base). While private fixed investment (up 26%) was the key driver behind the growth, exports grew only 15.1%. Growth in Taiwan's export sector, however, improved in October, indicating a 17.5% increase year-on-year; however, industrial production grew only 2.9% year-on-year.
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Thailand
The World Bank revised down its forecasts for Thailand's growth in 2005 to 5.8%, citing rising oil prices and weaker global demand. The growth environment in Thailand remains challenging: rising militarism in the southern part of the country was countered forcibly by the government of Prime Minister Thaksin Shinawatra; outcries at the government's heavy-handed response have made the Prime Minister’s bid for re-election in 2005 less clear. Amidst this uncertainty, consumer confidence statistics have been in slow but steady decline. Nonetheless, credit demand remains strong, and liquidity ample; real interest rates (deposit rates less inflation) are still negative, buoying domestic demand.
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