January 10, 2017

Top Markets 2016: Equity Markets Trumped Year-Long Worries!
As we head into a new year, we take a closer look into the top and bottom three performing markets under our coverage over the course of 2016.

by iFAST Research Team

Top Markets 2016: Equity Markets Trumped Year-Long Worries!

The fourth quarter of 2016 saw strong, dispersed and varied movements across equity and bond markets as investors and various participants start to digest developments across the world. As a whole, global equity markets posted gains, with the MSCI AC World index recording a 10.0% increase in 4Q 16, making 2016’s returns come in at 13.0%. On the other hand, bond markets experienced a sell-off in 4Q 16 as yields rose across the board, with the JPMorgan Global Aggregate Bond Index recording a -6.6% decline (in USD terms) in the fourth quarter. Nonetheless, the hefty depreciation of the ringgit (-7.8% during 4Q 16) has led to the global bond segment returning a 1.5% gain in 4Q 16, ending the year with a 6.5% gain.

Politics dominated 4Q 16, with much of the world’s attention on Trump Tower in Manhattan, New York as markets started to come to grips with the reality that the Republican nominee and real estate tycoon Donald Trump will be the next incoming president of the US. Since the election’s result, asset prices had started to reprice in expectations of the incoming Trump administration and what it means for the world. With expectations of fiscal expansion in the US, inflation expectations have risen alongside bond yields, and certain equity market segments have seen strong performance in November and December (industrials, financials and banks). On the other hand, certain emerging markets have felt the brunt of Trump’s rhetoric, and have seen their respective currencies fall against the USD since then. Should the incoming Trump administration successfully implement pro-growth policies such as corporate tax cuts or infrastructure spending, domestic growth in the US remains supported, which bodes well for US corporate earnings growth going forward.

In December, the European Central Bank (ECB) announced that it would extend its current stimulus programme to December 2017, but at a reduced amount (EUR 60 billion per month as compared to the current EUR 80 billion monthly). On the other hand across the Atlantic, the US Federal Reserve pulled the trigger for the first and last time in 2016, raising the benchmark Fed Funds rate by 25 basis points to 0.50% - 0.75%, marking the second time that the Fed has hiked rates in their current tightening cycle. Indicating confidence in the US economy, the Fed has also released their forecasts for the Fed Funds rate, and expects it to be close to 1.50% by end-2017 based on the median number from all officials, implying three possible 25-basis point hikes this year.

Asian equity markets as a whole did not perform as well as their developed counterparts in 4Q 16, with the benchmark MSCI Asia ex Japan index posting a 1.6% decline as compared to US, Japanese and European equities, which posted gains of 12.8%, 9.9%, 8.0% respectively. However in 2016 alone, many emerging markets outperformed their developed counterparts, with single countries like Indonesia, Thailand, Taiwan as well as Brazil and Russia topping the performance charts. The Chinese equity markets saw a more muted performance this time round, with the HSML 100 index recording a 4.0% gain in 4Q 16 (6.5 % in 2016), while its onshore counterpart (the Shanghai A index) posted a 7.8% gain but ended the year with a -12.8% loss. The Indian equity market were affected by Prime Minister Modi’s ‘demonetisation’ policies that spooked markets back in October and November, and ended 2016 with a slight 1.9% gain. Despite all the seemingly-negative headline political events thus far, we would like to point out that corporate earnings estimates in many markets across the world have seen gradual upgrades over the recent quarter, and we expect earnings to improve in 2017 as global economic momentum progresses. (click here for more information).

Table 1:Market Performance (In MYR Terms)

4Q 2016 Returns (%)
2016 Returns (%)
S&P 500
Emerging Markets
MSCI Emerging Markets
MSCI World
Nikkei 225
Asia ex-Japan
MSCI Asia ex-Japan
Hong Kong
HSML 100
Stoxx 600
China A
CSI 300 Index

Source: Bloomberg, iFAST compilations. Returns in MYR terms including dividends, as of end-December 2016

While our Key Investment Themes and 2017 Outlook covers our expectations for the year ahead, in this end-of-quarter update, we take a closer look into the top and bottom three performing markets under our coverage over the course of 2016. [All returns in MYR terms unless otherwise stated as of end-December 2016]

Top Performers

Brazil (+11.9% in 4Q 16, +76.1% for 2016 in MYR terms)

The Bovespa Index has risen 11.9% in 4Q 16 and a total of 76.1% in 2016, and has ended the year as the best performing market under our coverage. Brazilian equities have staged a strong rebound through 2016 on the back of improving economic data, an improvement in external factors (which could be tailwinds for the domestic economy in the near future) as well as the impeachment of former president Dilma Rousseff. These factors had led to the better performance of Brazilian companies in the year compared to that in 2015 as well as fed investor confidence in Latin America’s largest economy, thus providing good support to the share prices of Brazilian companies.

As of 31 December 2016, the earnings of Brazilian companies are expected to decline -7.6% in 2016 before increasing by 27.2% in 2017 and a further 20.9% in 2018. Through 2016, companies which saw the largest upward revisions in 2016 estimated earnings were Gerdau SA, Fibria Celulose SA and Cia de Saneamento Basico do Estado de Sa; while companies which saw the greatest downward revisions were Vale SA, Suzano Papel e Celulose SA and Bradespar SA. On aggregate, the industrials sector saw the largest upgrades in 2016 estimated earnings, while the materials sector appeared sluggish, with the largest downgrades in 2016 estimated earnings.

Brazil’s 3Q 16 GDP had come in at -2.9% year-on-year, up from 2Q 16’s upward-revised -3.6% year-on-year contraction and 1Q 16’s -5.4% decline. Yet, 3Q 16’s smaller year-on-year GDP contraction had disappointed on a quarter-on-quarter basis, as 3Q 16’s quarter-on-quarter decline of -0.8% was the largest in 2016. November and December 2016 had also seen some of Brazil’s economic indicators retreating slightly from their previous improvements seen in the earlier months. Such indicators include industrial production and retail sales. While November’s Markit manufacturing PMI had fallen slightly, service sectors had shown improvement in November, and thus, led to an improvement in the November’s Markit Composite PMI. The continued slowdown of inflation to 6.99% year-on-year in November coupled with the high Selic rate of 13.75% has continued to be supportive of further rate cuts in the near term, which would be favourable for the economy’s road to recovery. The slightly less encouraging economic data released over the last two months of 2016 had fed investors’ doubts regarding the economy’s pace of recovery, thus contributing to the significantly smaller 3.2% gain of the Bovespa index over 4Q 16 compared to the double-digit gains seen in the prior quarters of 2016. Given that there has only been around 2 months of slightly less positive economic data, it still remains too early to adopt a more pessimistic view of the economy in the near term. As of 30 December 2016, a weekly survey of about 100 economist conducted by the Brazilian central bank revealed that the consensus is expecting the economy to contract -3.49% in 2016 before expanding 0.50% the following year.

As of 31 December 2016, the index trades at PE ratios of 12.2X and 10.1X for 2017 and 2018 respectively, compared to its fair PE ratio of 11.5X. Given our long term investment philosophy, we place a larger emphasis on the index’s 2018 PE ratio than on its 2017 PE ratio, which currently signifies a discount to its fair PE ratio. We retain our 3.5 Stars "Attractive" rating for the Brazilian equity market.

Russia (+27.4% in 4Q 16, +65.7% for 2016 in MYR terms)

Russia’s RTSI$ Index has gained 27.4% in 4Q 16 and 65.7% through 2016, and has thus ended the year as the second best performing market under our coverage. As of 31 December 2016, the earnings of Russian companies are expected to have risen by 13.4% growing a further 11.8% and 14.3% in 2017 and 2018 respectively. Through 2016, companies with the largest 2016 estimated EPS upgrades include mining and metals company Mechel PJSC, diamond mining giant Alrosa PJSC, as well as utilities company ROSSETI PJSC. Meanwhile, companies with the greatest downgrades in their 2016 estimated EPS include food retail company DIXY Group PJSC, oil and gas company Surgutneftegas OJSC, and aluminium company United Co RUSAL PLC. In aggregate, one of the sectors which saw the greatest upgrades in 2016 estimated earnings was the utilities sector while one of the sectors which saw the greatest downgrades was the energy sector, in part due to the beaten-down oil prices in the year.

Final estimates for Russia’s 3Q 16 GDP showed a year-on-year contraction of -0.4%, up from 2Q 2016’s -0.6% decline and was the smallest decline in GDP in 7 quarters. Consumer demand (-4.1% year-on-year decline in November 2016’s retail sales against -14.1% decline in December 2015) seems to be stabilising and inflation had continued to decelerate (5.8% year-on-year increase in November 2016 compared to 12.9% in December 2015). The Markit manufacturing PMI registered a surprise 53.6 reading for the month of November 2016, up from October’s 52.4 reading, making November the fourth consecutive month to show an expansion and November’s Markit services PMI had also increased for the first time in four months to 54.7. Recent readings seem to suggest some stabilisation in manufacturing PMI while services PMI eased.

As widely expected, the central bank had held rates at 10.00% despite slowing inflation. This is in line with the central bank’s previous comment that it is looking to allow the trend towards a sustainable decline in inflation to strengthen. Yet, it is seemingly likely that policymakers would carry on with their easing cycle at a gradual pace in 2017 so as to spur further growth in Russia, should economic conditions allow them to do so. As at 31 December 2016, consensus expectations is for Russia’s economy to contract -0.5% in 2016 before turning positive in 2017 with a 1.1% GDP growth.

There are a couple of attractive points with regards to the Russian market in terms of the presence of an active government that has thus far implemented a slew of measures to support the banking and vital energy sectors, as well as the good likelihood of further rate cuts in the near term should conditions remain suitable, which could spur economic growth. However we remain cognizant on the economy’s heavy dependence on the energy sector, elevated geopolitical risks, and inefficiencies in the labour market as well as on a country and firm level. Structural reforms thus continue to remain important in sustaining the country’s long term economic growth.

As of 31 December 2016, the index trades at estimated PE ratios of 6.8X and 5.9X for 2017 and 2018 respectively, compared to its fair PE ratio of 7.0X. We retain our 4.0 Stars "Very Attractive" rating for the Russian equity market.

Thailand (+9.3% in 4Q 16, +29.5% for 2016 in MYR terms)

Thailand’s equity market reversed its losses after bottoming out in the year of 2015 and emerged as one of the top three amongst markets under our coverage in the year of 2016. After achieving three consecutive quarters of positive performance, the SET Index extended its winning streak, posting a gain of 9.3% in 4Q 2016, enduring shocks from the pass away of the late Thai King and bearing foreign fund outflow amid the recent greenback rally following Trump’s victory.

Thailand’s economy grew 3.2% year-on-year in 3Q 2016, sliding below consensus forecast of 3.4% and 2Q 2016’s 3.5% growth. Correspondingly, the Thai economy registered a 9-month period growth of 3.3%. As weather conditions improved, the agriculture sector rejoiced with a rebound in crop yields together with the increase in production of livestock and fishery. These have led to a 0.9% year-on-year growth in the overall agricultural production after declining for seven quarters straight. The non-agricultural sector expanded by 3.2% over the same period as well, supported by services sectors while manufacturing activity eased. On the expenditure side, private consumption rose 3.5% year-on-year in 3Q 2016 together with rising disposable income following increased crop harvest. We expect the Thai economic growth to slowdown in 4Q 2016, as the recent measures to curb illegitimate tour operators as well as the 100-day mourning period for the late Thai King coincided with the peak holiday season of the year. This is likely to affect the tourism related sectors, which accounts for about 20% of the nation’s GDP. Despite so, we expect the negative impact to be minimal and short-lived.

Earnings forecast for the SET Index were downgraded by -0.3% over the last quarter of 2016, led by the trim in earnings in the consumer discretionary (-1.5%), industrials (-0.8%) and telecommunications (-1.1%) sectors. On the other hand, the energy sector saw its earnings forecast upgraded (1.4%) on the back of the OPEC’s oil supply cut deal. For the whole of 2016, Thai companies have had their earnings forecast slashed by -4.6%, with most of the downgrades attributable to the consumer discretionary (-10.7%) and telecommunications (-24.6%) sectors. As of 29 December 2016, the SET Index registered an earnings growth of 6.0% over the year of 2016, and is expected to deliver earnings growth of 10.9% for the year of 2017.

Moving forward, we foresee private consumption activities to recover gradually as the mourning period ends. The commencement of the long-overdue mass rapid transit (MRT) projects in 2017 is likely to stimulate both private and foreign investment and Thailand’s political scene is expected to remain stable on the back of the new constitution. Infrastructure expenditures could provide a thrust to the growth of the Thai economy. As of 29 December 2016, the SET Index is trading at PE ratios of 16.0X and 14.4X for 2016 and 2017 respectively, which are higher than our recently revised fair PE ratio of 14.0X. While valuations appear stretched at this juncture, we believe that the newly approved constitution allows the military-backed government to concentrate on economic development and social improvements, and this could have a positive spillover effect towards the growth of the economy going forward. With that, we maintain the star rating of the Thai market at 3.0 stars “Attractive”.

Bottom Performers

Europe (+8.0% in 4Q 16, 3.5% for 2016 in MYR terms)

The European equity market (as represented by the Stoxx 600 index) rose 6.8% in the fourth quarter of 2016, registering a year-to-date return of 8.0% in MYR terms to land up as one of the bottom performing markets under our coverage. In EUR terms, the market posted a 5.4% gain in 4Q 2016, making year-to-date price returns a -1.2% loss (as of 30 December 2016). Banks like Credit Agricole, Societe Generale, Deutshce Bank, Mediobanca and Barclays were some of the quarter’s best performing stocks, while companies like GEA Group, Aberdeen Asset Management, Veolia Environnement and Randgold Resources were the bottom performers. In 2016, Europe’s best performing stocks include energy and materials companies like Fresnillo, Tullow Oil, BHP Billiton and John Wood Group, while Italian banks were found at the bottom.

Corporate earnings estimates for European companies on aggregate have been revised higher over the quarter, with 2016’s estimated earnings upgraded 2.9% higher while 2017’s and 2018’s estimated earnings were revised 3.0% and 2.1% higher respectively (as of 30 December 2016). A combination of improving data from emerging markets as well as in Europe itself contributed to the earnings upgrades. Companies from the basic resources sector (like Antofagasta, Anglo American, BHP Billiton, Fresnillo) continued to enjoy strong EPS upgrades for 2017 over the quarter. European banks and insurers also saw EPS upgrades in late November and December as sell-side analysts start to revise better earnings prospects from higher interest margins. Moving forward, corporate earnings are expected to remain supported as several leading indicators in Europe are holding up well despite an increase in political uncertainty thus far.

On 8 December 2016, the European Central Bank (ECB) announced that it will maintain its current rates on its deposit and margin lending facility. However, the central bank also announced that it will henceforth modify its current asset purchase programme by extending it to the end of December 2017 and it would be running at EUR 60 billion monthly starting from April 2017 onwards (instead of the current EUR 80 billion per month). The ECB also stated that in order to tackle the possible issue of insufficient bonds, it will expand the range of bonds it will purchase by lowering the remaining maturity of the bonds it will purchase from two years to one year. This has an effect of steepening the yield curve in the Eurozone region, helping to alleviate profitability concerns of banks and insurers. Additionally, although inflation has continued its gradual uptrend since end of 2H 2016 due to higher energy prices, inflationary pressures are expected to remain supported due to gradual economic stabilisation in the Euro region moving forward.

At current levels, the European stock market trades at PE ratios of 13.9X and 12.8X based on 2017’s and 2018’s estimated earnings respectively, as compared to our estimated fair PE ratio of 13.5X. Earnings growth would be a key driver for European equity returns – we retain a 3.0 Stars “Attractive” rating for the European equity market.

Malaysia (0.0% in 4Q 16, 0.1% for 2016 in MYR terms)

Despite having a solid start in 1Q 16, Malaysian equities, as represented by FBMKLCI Index, has recorded 3 consecutive quarters of losses subsequently, ending the year as one of the bottom performing markets under our coverage with a loss of -0.2%. In 2016, some of the top performing stocks were Hap Seng Consolidated Bhd, KLCCP Stapled Group and RHB Bank Bhd while some of the bottom performing stocks include Axiata Group Bhd, SapuraKencana Petroleum Bhd and MISC Bhd.

2016’s estimated earnings for the FBM KLCI Index were revised downwards by -5.4% over the year. The earnings downgrades were broad based, with the defensive sectors like Healthcare (22.4%) and Utilities (8.0%) being the only exceptions. Among all sectors, the earnings downgrades were especially pronounced for the Energy sector, with analysts slashing 2016’s and 2017’s earnings by as much as -41.7% and -40.6% respectively due to disappointing earnings results amid a low oil price environment. The Telecommunications sector also saw significant earnings downgrades over the year (-18.0% for 2016 and -19.3% for 2017) as consensus priced in weaker profitability due to spectrum relocation and stiffer competition amidst a maturing market.

On the economic front, Malaysia’s GDP has rebounded from a 4.0% year-on-year expansion in 2Q 16, registering a 4.3% year-on-year growth in 3Q 16. The latest result also came in above the consensus estimates for a 4.0% year-on-year growth. This marked the end of the five consecutive quarters of slower growths since 2Q 15. Despite a better GDP figure, growth remained weak overall. Looking at the breakdown of GDP growth by expenditure components, the better GDP figure in 3Q 16 was contributed by an improvement in private consumption and a decrease in imports, offsetting the weak investment and exports growths over the quarter. While the external sector may continue to be lackluster ahead, economic conditions should take a turn for better in 2017, considering a resilient private consumption and pick up in government spending amid higher collection from direct taxation and oil related revenue.

The MYR, along with most emerging market currencies, has experienced sharp adjustments and significant volatility following Trump’s victory in the US presidential election. Trump’s expected inflationary policy promises have sparked expectation for higher US rates, leading to a sell-off in domestic sovereign bonds which in turn weakened the MYR as those proceeds left the country. In response, Bank Negara Malaysia (BNM)’s has maintained the OPR rate at 3.00% in its recent monetary policy meeting and introduced a new FX policy to support the MYR. This coupled with rising crude oil prices could mean that the worst for the MYR is behind us now.

As economic growth is projected to pick up in 2017, the outlook for corporate earnings looks brighter ahead. Corporate profit is likely to regain positive momentum and grow at a moderate pace in 2017, ending the two-year earnings recession in 2015 and 2016. A turnaround in corporate earnings should support local equities trending higher this year. That said, with valuations trading at a slight premium of 16.3X now, equity returns for KLCI for 2017 is likely to be modest at best, considering earnings growth should be the major contributor to equity return, which we expect to come in at mid-single digit this year. As such, we maintain Malaysia’s equity market at 3.0 Stars "Attractive" for now.

China A (+6.2% in 4Q 16, -11.6% for 2016 in MYR terms)

The local Chinese equity market, as represented by the CSI 300 index, has become the bottom performer under our market coverage throughout 2016, with a full year return of -11.6%, despite having posted a positive gain of 6.2% in 4Q 16. Among the 10 sectors of the CSI 300 index, only the consumer staples sector posted a positive return (of 8.4%), while the other sectors all delivered negative returns. Generally speaking, the Chinese A-Share market performance in 2016 showed a great divergence between small-cap and large-cap segments, with large-caps performing better than small-caps.

At the beginning of the year 2016, haunted by concerns over slower economic growth, continued RMB depreciation and the introduction of “circuit-breaker mechanism” into the stock market, China A-shares plunged substantially (more than -21.0% in local currency terms back in January). The market gradually recovered upwards over the year.

On the economic front, China’s economic data have showed positive signs thus far. China’s GDP growth for 4Q 16 will most likely come in at 6.7% year-on-year, similar to the first three quarters of 2016 and in line with the government’s target. However, the pace of the RMB’s weakening has accelerated notably during the quarter, but it is driven mainly by the USD’s strength. In 2017, the RMB is expected to continue weakening as the Fed continue to tighten monetary policy in the US via rate hikes, which could lead to capital outflows. In order to further control capital outflows, the probability of continued monetary easing seems to be relatively low in the near future. Additionally, policy tightening may also not be on the table considering the priority of stabilising the economy. At the Central Economic Working Conference (CEWC), the press release indicated that the government’s policy will mainly focus on stability in 2017, while monetary policy stance should stay "prudent". This statement indicates the government may stay cautious on credit expansion and monetary policy may not be as loose as in 2016.

During the National Day break, local governments imposed restrictions on real estate purchases as the central government struggled to avoid a housing bubble. Therefore, in 2017, the key factor will be the cooling down of the real estate market, as it contributed 50 basis points of China’s GDP growth rate of 6.7% during the first three quarters of 2016. With the successful launch of SZ-HK Stock connect on 5 December 16, there is an increasing probability of the A-Share market being included into MSCI benchmarks in 2017 and global investors will increase their China A allocation ratio in the future gradually. While the Chinese A-Share market underperformed its peers this year, its underperformance has translated into rather compelling and attractive valuations in 2017. As of 30 December 2016, the CSI 300 Index is currently trading at estimated PE ratios of 11.2X and 10.2X based on estimated earnings in 2017 and 2018 respectively, a discount to its fair value of 15.0X. As such we maintain our 3.5 Stars "Attractive" rating for the China A-share market.

Stay Diversified And Disciplined!

2016 was a year characterised by spouts of volatility following several unexpected events (Brexit, Trump). Looking back, they were great opportunities granted to us by Mr Market to gain exposure into markets that display compelling valuations. One such area is Asia ex Japan, which is a region that is poised for high potential upside returns moving forward (see our outlook for 2017)!

Additionally, 2016 also taught us to stay diversified across asset classes (owning both bonds and equities) and across geographic markets. A well-diversified portfolio could capture performance returns from various parts of the world and yet remain afloat if one market segment severely underperforms. Remember to stay diversified and stick to your investment plan!

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