Posted inEquitiesAsia

Asia ex-Japan equities bloom but volatility lurks

Following a difficult start to the year, Asian equities picked up in the third quarter of 2016. The MSCI AC Asia ex Japan Index showed a return of 10.14% in US dollar terms over the third quarter, which compares positively against the MSCI AC World Index return of 5.3%.

The performance was driven by rebounds in Chinese, Taiwanese, and Korean shares, all of which posted double-digit returns during the period.

Chinese equities, which make up a third of the MSCI AC Asia ex Japan Index, outperformed strongly in Q3, delivering a return of 13.93% on the back of better-than-expected Q2 corporate earnings results and signs of stabilisation in the economy. Beijing’s approval of a trading link between the Hong Kong and Shenzhen stock exchanges also buoyed sentiment.

Taiwan flows

In Taiwan, share prices increased on the continued strength of foreign investor inflows, with technology and financials the leading beneficiaries. Korean stocks saw solid gains for similar reasons as foreign investors were net buyers of shares over the period. India also did well, although renewed political tension with Pakistan towards the quarter-end pared gains.

Performance across south-east Asia was mixed in the third quarter. Indonesian stocks responded positively to the passage of the Tax Amnesty bill and the reappointment of reformist Sri Mulyani Indrawati as finance minister.

Thailand maintained its good run, lifted by the outcome of the referendum supporting the draft constitution.

In contrast, comments made by Philippine president Rodrigo Duterte about Barack Obama, and testimony concerning his previous criminal activities resulted in the decline of Philippine shares.

Supercharged performance

In terms of sector performance year to date, technology has been the best-performing sector, with Samsung Electronics (+51%), Tencent (+40%), Taiwan Semiconductor Manufacturing Company (+39%) and Alibaba (+30%) among the key contributors.

The world’s largest maker of smartphones and semiconductors, Samsung Electronics, surged on the back of robust sales of its flagship smartphones, such as the Galaxy S7 series and the release of Galaxy Note 7 tablet. The company earned $7.19bn in the April-June period, up by 18% from the same period the year before.

This was before some Galaxy Note 7 tablets exploded shortly after release in September due to battery problems, causing injuries and damage to personal effects. This resulted in the steep decline of Samsung shares as the company had to stop production of the product and cut its third quarterly profit estimate by one-third.

Shenzhen-based internet and media giant Tencent, one of the world’s biggest technology conglomerates, posted impressive increases of 48% and 41% in total revenue compared with a year ago, and net profit to cny67.7bn ($10.1bn) and cny20.1bn, respectively, for the first half of this year.

Market experts believe that Tencent has further upside potential in its share price, propelled by better-than-expected earnings growth and the projected kickoff of the Shenzhen-Hong Kong Stock Connect before the end of the year. Tencent’s growth drivers are an increasing number of users and improvement in the development of mobile games, social media, payment services and advertising.

Taiwan Semiconductor Manufacturing Company (TSMC), the world’s largest contract chip maker, which supplies manufacturing parts for Apple, saw its sales jump 8% during the second quarter. The company has also established a 10-nanometer processing facility, with mass production projected to start by the end of the year. Analysts believe this will help the company extend market share and give it a competitive edge over US-based Intel Corp.

Chinese e-commerce giant Alibaba continues to beat market consensus for growth in both revenues and earnings per share. The Chinese equivalent of Amazon, Alibaba is increasingly looking to the US for growth. The company is also aiming to become a powerhouse in cloud computing and online entertainment, much like Amazon under chief executive Jeff Bezos, through the Amazon Prime service offering.

Part of the Bonhill Group.