Macro Research

3Q 2019 market report card – Top performing markets

The report cards of global equity markets for the third quarter of 2019 is out. Let’s find out which markets reigned as the top three in terms of performance so far.

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  • Published on 05 Oct 2019

3Q 2019 market report card – Top performing markets | Open a FREE FSMOne account and manage all your investments conveniently in ONE place

Top 3 markets for the third quarter of 2019 are Japan (+4.2%), US (+3.4%) and Taiwan (+2.8%) in SGD terms.

For Japan, equities surged spectacularly upon the news of a resumption in the US-Sino trade talks, alongside investors’ rotation into the lower valued markets amid the heightened volatilities across global capital markets.

For US, the two rate cuts by the Feds in the third quarter boosted equities and kept sentiments buoyed, despite the combination of a re-escalation of tariffs and the impeachment attempt of President Trump threatening to weigh US equities down.

For Taiwan, investors’ optimism over a near-term recovery in Taiwan’s dominant semiconductor industry fuelled a strong September rebound, with foreign investors stacking exposure into its equity market, parring losses incurred in August. 

Into 4Q 2019, we continue to find Japan and Taiwan equity markets attractive, while staying cautious on US equity market due to the mounting risks and macroeconomic headwinds.

We maintain our star ratings of Taiwan at 4.0 stars “Very Attractive”; Japan at 3.5 stars “Attractive”; and US at 2.0 stars “Not Attractive”.


A recap of 3Q 2019 in global markets


Once again, the recent quarter provided a stark reminder of how rapidly things can change within the markets. While the MSCI AC World Index rose 1.6% (in SGD terms) over the third quarter, that is not to say 3Q 2019 was all smooth sailing. The unceasing trade fracas and the re-escalation of tariffs roiled global markets, which ultimately reshaped the outlook of markets moving forward.

We started the quarter with a euphoric agreement on resuming trade negotiations at the G20 summit held at the end of June. Things took a turn for the worse in August, when the fragile truce fractured and regressed into a full-blown trade re-escalation. The concoction of trade animosity and a sudden inversion in the yield curve dragged global equity markets south, vaporising gains accrued from prior month. 

Fortunately, September was kind to investors as equity markets reversed losses from the previous two months, while nominal bond yields broadly increased. The synchronised interest rate cuts by major central banks, as well as their firm commitment to continue easing monetary policies buoyed global equity markets.

Chart 1: MSCI ACWI Index third quarter performance

 

Table 1: Market Performance (In SGD Terms)

Market Index 3Q 19 Returns
Japan Nikkei 225 4.2%
US S&P 500 3.4%
Taiwan TWSE 2.8%
World MSCI AC World 1.6%
Europe Stoxx 600 0.2%
Indonesia JCI -1.2%
Russia RTSI$ -1.3%
China A CSI300 Index -2.1%
India BSE SENSEX -2.2%
Brazil Bovespa -2.4%
Thailand SET -3.0%
Emerging Markets MSCI Emerging Markets -3.1%
Asia ex-Japan MSCI Asia ex-Japan -3.3%
China HSML100 -4.4%
Malaysia KLCI -4.4%
Korea KOSPI -4.4%
Singapore FTSE STI -6.1%
Hong Kong HSI -6.9%
 Source: iFAST Compilations, Bloomberg
Data as of October 2019

Top Performing Markets – Japan, US, Taiwan

1. Japan (+4.2% in 3Q 19 in SGD terms)


3Q Recap

Japanese equities (Nikkei 225 index) on aggregate, over the third quarter, were bolstered by a spectacular surge in September (Nikkei 225 index gained 5% in local currency terms). After plunging in August, Japanese equities rallied upon news of a resumption in trade talks while also buoyed by a rotation to low valued markets from global investors. The Nikkei 225 index was trading at an attractive valuation level of 15.0X PE ratio (as of 30 Aug), as compared to our fair value of 18.0X. 


Macro View

Japan’s economy remains challenged by multiple headwinds moving forward. As an export-led economy (largest trade partners are US and China), Japan’s growth is closely tied to global growth. The trend in deterioration of Japan’s cyclical manufacturing industries remains unabated and suggests that the global slowdown continues to weigh on its economy. It is reinforced by the continuing decline in the tankan survey, manufacturing PMI and export readings. 

Japan’s domestic demand remains healthy but 1 October’s increase in consumption tax will weigh down private consumption, which will be reflected in 4Q 2019’s GDP growth. Overall, external macro headwinds loom over Japan despite a resilient domestic demand and thus, annual GDP growth are expected to come in muted at around 0.9% and 0.3% for FY2019 and 2020 respectively (chart 2).

Equity View

We continue to favour Japanese equities from a fundamental perspective. While Japanese equities have rallied, valuations remain cheap and potential upsides remain attractive. Dividend yield continues to improve, nearing all-time high, and is expected to hit 2.2% in FY 2020 (as of 1 October). 

Moreover, trailing 12-month profit margin for Japanese corporates has accelerated and remains elevated near all time high. This is supported by recent reforms in corporate governance, which has drove up the ROE for Japanese corporates making them more attractive. Overall, we maintain our 3.5 “Attractive” rating for Japan.

Chart 2: Japan’s muted GDP growth


Chart 3: Nikkei 225 index performance and 12M forward EPS



2. US (+3.4% in 3Q 19 in SGD terms)


3Q Recap

Like many other markets, US equities traded sideways over the third quarter. Aside from the news of the re-escalation of tariffs, additional political jitters such as the Trump impeachment attempt also weighed US equities down within the quarter.

Conversely, the two rate cuts by the Feds with the third quarter supported US equities prices and kept sentiments buoyed. Within the US equities space, large cap plays outperformed their smaller caps counterpart as investors gravitated towards the stability of large caps vis-à-vis the more pro-cyclical small caps.

Macro View

The US economic growth is gradually softening, albeit US consumption remains relatively resilient. While job creation in the private sector dipped, multiple other indicators are holding up. This suggests that the labour market remains relatively tight despite recent cracks (chart 4). The strong labour condition lends much support for US consumption, the single largest driver of its economy, which maintained its solid trajectory despite marginal decline in the real disposable income. In our assessment, US consumption remains robust and will be able to buttress headline growth moving forward. 

Nonetheless, we caution against moderating economic growth in a late-cycle US economy. Manufacturing activities continue to fall further south while the business sector slows, as equipment investment and capital goods shipments remain sluggish. 
At the same time, any unexpected escalation in trade disputes can rapidly sent US growth momentum southwards in our view. Annual GDP growth are expected to moderate, coming in at 2.3% and 1.7% for FY2019 and 2020 respectively.

Equity View

We remain underweight US equities as risks are mounting in the current backdrop. The trade conflict remains the biggest risk as we believe the next round of tariffs (and China’s retaliation) will be damaging to the US economy. The slowing economic growth, domestic political skirmishes and a late credit cycle are additional headwinds for corporate earnings. Conversely, upside for US equities remain limited in a late business cycle and with interest rates at lower levels (compared to prior cycle) support for US equities has also dwindled. 

From a fundamental perspective, valuation levels have been persistently expensive as US equities currently trades at 17.5X PE ratio (compared to its fair PE ratio of 15X). Estimated earnings growth also remains muted at 2%, 11% and 9% for FY 2019, 2020 and 2021 respectively (as of 3 Oct 2019). With that said, we believe the risk-reward for US equities as compared to other markets has skewed. Therefore, we maintain our 2.0 “Not Attractive” rating for the US.

Chart 4: US labour market remains relatively resilient since US-Sino trade conflict


Source: iFAST Compilations, Bloomberg
Data as of October 2019

Chart 5: S&P 500 index performance and 12M forward EPS


3. Taiwan (+2.8% in 3Q 19 in SGD terms)


3Q Recap

While a choppy August as a result of a re-escalation of tariffs threats sent Taiwanese equities (TWSE index) plunging, its subsequent vigorous pullback in September pared losses when the market shot up to near its one year high. 

Optimism over the Taiwan’s dominant semiconductor industry fuelled its September recovery as foreign investors piled into Taiwan’s market. Semiconductor plays led 3Q 2019’s gains as Taiwan market’s TSMC, MediaTek, Nanya Technology and ASE Technology are amongst the top five gainers in the quarter.

Macro View

Caught in the middle of the US-China trade conflicts and the global semiconductor downcycle, Taiwan’s economic growth has faced immense downward pressure in 2019. Sluggishness in Taiwan’s economy continues to prevail as external demand remains weak, which keeps growth in the export-dependent economy pinned down. 

This is reinforced by decelerating export numbers from Taiwan, in particular electronics exports, which make up more than 40% of total exports, which has been soft as the trade dispute dampened global appetite. However, the recent quarter saw a pickup in manufacturing and industrial activities. Manufacturing PMI has rebounded back to 50.0 while industrial production has seen a meaningful pickup since 1Q 2019 (chart 6). 

Given the significance of manufacturing and industrial activity to Taiwan’s economy (especially in the semiconductor space), we believe a sustain pickup in these economic activities might support its economy moving forward. Annual GDP growth are expected to come in at around 2.1% and 2.0% for FY2019 and 2020 respectively.

Equity Outlook

We remain positive on Taiwanese equities. Its strength as a global electronics manufacturing powerhouse meant that it is well-positioned for a cyclical upswing in the semiconductor demand. In our view, the global semiconductor sector is set for a strong recovery in the coming quarters. With close to half of its equity market comprising of electronic manufacturers, a recovery in the semiconductor sector will significantly boost the market. 

While valuation multiples have expanded as a result of the recent run up in equity prices, earnings growth remains supportive (10% for both FY 2020 and 2021) and downwards revision has halted. Moreover, dividend yield remains fairly attractive (compared to regional peers) at around 4.0% (as of 3 Oct 2019). We maintained our 4.0 stars “Very Attractive” rating for Taiwan.

Chart 6: Manufacturing and industrial activities have rebounded
 

Chart 7: TWSE index performance and 12M forward EPS


 

Still favor Taiwan and Japan, while cautious towards US.

As we head into 4Q 2019, we continue to see attractiveness in Japan and Taiwan equity markets, while staying cautious on US equity market due to its mounting risks and macroeconomic headwinds.

In a nutshell, we maintain our star ratings of Taiwan at 4.0 stars “Very Attractive”; Japan at 3.5 stars “Attractive”; and US at 2.0 stars “Not Attractive”.

Investors seeking an actively-managed solution should definitely consider Fidelity Taiwan A-USD and LionGlobal Taiwan SGD to accumulate an exposure to the Taiwan equity market.

Investors seeking a more passive option can consider the db x-trackers MSCI Taiwan Index UCITS ETF (HD7) listed on SGX and iShares Core MSCI Taiwan Index ETF, which seek to track performance of TAIEX closely.

Investors seeking an active approach to Japan equities can consider our recommended funds, the JPMorgan Funds - Japan Equity A (dist) SGD and United Japan Small and Mid Cap SGD.

Investors seeking a more passive option can consider our recommended ETF for Japan, iShares MSCI Japan ETF as one of the investment instruments. 

The Research Team is part of iFAST Financial Pte Ltd.  


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