Market volatility: The view from Hong Kong

Editor’s note: The Asian Listed Equities team at Macquarie Asset Management has been managing Asian equities on the ground in Hong Kong since 2008. For more insights on China, India, and other Asian markets, please read the team’s 2016 Investment Outlook.

Recent market volatility in China has created a ripple effect across global markets, creating uncertainties for investors. Sharp falls in the Shanghai Stock Exchange Composite Index, as well as softening of the renminbi have once again set off a series of questions about China’s markets, its economy, and the implications for global growth.

With such circumstances in mind, we want to remind investors that we only invest in less-volatile H-shares of Chinese companies, which are issued and traded in Hong Kong; we do not invest in the A-shares traded in mainland China. Furthermore, we maintain the same investment process that we always have, continuing to focus on bottom-up, fundamental analysis. We remain focused on corporate governance, domestic demand, and local consumption, while avoiding cyclical sectors and exporters.

Recent moves across the portfolios we oversee have included profit-taking in South Korea, given the strong performance that led valuations to be rich on certain stocks. We took advantage of market volatility and added to companies at attractive valuations as the market corrected. Examples include tourism-related stocks in Thailand and diversified financials in Hong Kong and mainland China.

Short- and medium-term outlook

Interest rate hikes are unlikely

We believe rates in China are likely to remain trending downward, with further reductions in rates and cuts in the reserve requirement ratio as the People’s Bank of China uses liquidity in an effort to stabilize the slowing economy. This is likely to continue in the short- and medium- term, as economic growth is slowing and inflationary pressure remains low. Other countries with stable fiscal balances are likely to be on an easing bias as well — Taiwan, Korea, and India are likely candidates. However, this does not have an effect on our portfolio or our overall strategy at the stock level.

Influence of the strong U.S. dollar

We monitor the currency effects of a stronger dollar (such as relatively weaker Asian currencies from a company level, via translation effects of revenue/earnings and balance sheet impacts). We also monitor the macroeconomic effects of capital flows that could result from currency swings, as in the case of strong depreciation in the Malaysian ringgit and the Indonesian rupiah in 2015 (which happened due to a strengthening dollar, commodity price declines, and capital outflows). We minimize currency effects within the portfolio by keeping our country allocation relatively close to the benchmark* (usually within a margin of plus or minus 5 percentage points).

Overall, we remain cautiously optimistic about Asian equities in general, but are aware of the volatile macroeconomic backdrop and external factors that are beyond company fundamentals. Nonetheless, we remain focused on rigorous research on a stock-by-stock basis, and we note that overall Asian equities valuations are attractive, trading at a notable discount to 10-year averages.

* The MSCI All-Country Asia ex-Japan Index

The views expressed represent the Manager's assessment of the market environment as of January 2016 and should not be considered a recommendation to buy, hold, or sell any security, and should not be relied on as research or investment advice. Views are subject to change without notice and may not reflect the Manager's views.

Carefully consider the Funds' investment objectives, risk factors, charges, and expenses before investing. This and other information can be found in the Funds' prospectuses and their summary prospectuses, which may be obtained by visiting or calling 800 523-1918. Investors should read the prospectus and the summary prospectus carefully before investing.


Investing involves risk, including the possible loss of principal.

Past performance does not guarantee future results.

International investments entail risks not ordinarily associated with US investments including fluctuation in currency values, differences in accounting principles, or economic or political instability in other nations.

Investing in emerging markets can be riskier than investing in established foreign markets due to increased volatility and lower trading volume.

The Shanghai Stock Exchange Composite Index tracks the daily price performance of all A-shares and B-shares listed on the Shanghai Stock Exchange. (A-shares are typically only available for purchase by mainland Chinese citizens, while B-shares are available for domestic as well as foreign investments.)

The MSCI All Country Asia ex Japan Index represents large- and mid-cap stocks across two of three developed market countries in Asia (Hong Kong and Singapore, not Japan) and nine emerging market countries in Asia (China, India, Indonesia, Korea, Malaysia, Pakistan, the Philippines, Taiwan, and Thailand). The index covers approximately 85% of the free float-adjusted market capitalization in each country.

Indices are unmanaged, and one cannot invest directly in an index.

The original author of this piece has left the firm.

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