an indian summer for global markets
October 2017
For retail use, October 2017
September – An “Indian Summer” for global markets!
Global markets posted strong performance in September driven primarily by
economic fundamentals, with developed markets (DM) taking the lead.
China’s markets have performed well ahead of the upcoming 19th
Communist Party Congress in October, with low levels of volatility. In this
month’s Monthly Macro View, Geoff Lewis leads investors through the latest
market developments.
Review of markets in September 1
In what is usually one of the seasonally weaker months, global stock markets put on another strong
performance in September, chalking up new heights.
The MSCI World equity index rose 2.3% in September, the eleventh successive month of positive
returns. This marked the second longest string of increases since the index began in 1969. 2 Since midAugust the rally has broadened out to include some of the previously lagging sectors, supported by
strong economic data and renewed hopes of tax cuts in America.
Developed markets lead the way
Developed markets (DM) took the lead in September, as MSCI US rose 2.0%, MSCI Europe 3.3% and
MSCI Japan 2.1%. Emerging markets (EM) slipped a little, with a negative 0.4% return. But they
remained firmly in the lead for the third quarter overall, with a gain of 8.0% for EM versus 5.0% for DM. A
stronger world economy is being reflected in more optimistic consensus forecasts of the medium-term
earnings outlook for companies, which we see as having played a large role in the current rally.
The near-term earnings outlook is also promising, as 43 S&P 500 companies have issued positive
earnings guidance well above the 5-year average of 27, and the third highest number for a quarter since
FactSet began tracking earnings-per-share (EPS) guidance in 2006. At the sector level, companies in
the information technology, healthcare, and consumer discretionary sectors account for 39 of the 43
companies issuing positive EPS guidance for the third quarter.
Hong Kong and China equities shine in the third quarter
Turning to Asia, Hong Kong stocks rose another 8.6% in the third quarter of 2017 and are up 30% yearto-date, making Hong Kong's Hang Seng the world's top performing major index, 3 beating Asia exJapan, the US, Europe and EM. A Chinese internet giant accounts for 30% of the Hang Seng's rise this
year. The Boston Consulting Group estimates that China's 710 million internet users spent almost US$1
trillion online last year, with no sign of growth slowing.4 With internet penetration only 52% in China,
………………………………………………………………………………………………………………………………………
1
Manulife Asset Management, FactSet, as of 29 September 2017. Equity indices are calculated in total returns in US dollar.
See Societe Generale, Global Equity Market Arithmetic, 2 October 2017.
See SCMP, 'Hang Seng Index Cuts Above Rivals in Nine Months,' 30 September 2017.
4
SCMP, page B4, 30 September 2017.
2
3
For retail use, October 2017
there is still plenty of room for the market to grow. Chinese IT giants have established network
advantages that will make it difficult for foreign competitors to make significant inroads in the near term.
In Mainland China, the Shanghai Composite Index rose 6.2% in the third quarter, its strongest rise since
the fourth quarter of 2015. Consumer stocks performed well in the third quarter. Mainland stock markets
are closed for the Golden Week public holiday (2 to 6 October) and on re-opening are expected to be in
a 'wait-and-see' mode ahead of the Chinese Communist Party’s 19th National Congress which begins on
18 October. The relative tranquillity of China A-shares is a notable trend.
China A-shares share in the tranquillity
An unusual degree of tranquillity has been a much discussed feature of DM equities in 2017. Perhaps
less commented on is that Mainland China equities – regarded by most western investors as inherently
volatile – has also been enjoying a period of unusually low volatility (Figure 1). Look at the chart and
visually exclude or "take out" the peak in volatility in mid-2015 that accompanied the sharp “patriotic”
rally in stocks. What you see then is a broadly flat volatility trend in Chinese A-shares (SH Composite
Index) for almost 20 years (from 1996 to 2015) averaging around 20% 3-month annualised. Most
recently there has been a move lower to levels not seen since 1992.
5
Figure 1: Shanghai Composite Index 90-day Volatility
One explanation is that the current exceptionally low volatility in Chinese equities reflects the efforts of
Chinese regulators ahead of the key Communist Party congress in mid-October when there will be a
reshuffle of the top leadership. The China Securities Regulatory Commission (CSRC) stated that they
will strive to ensure “stable operations of the capital market” and create a congenial, sound atmosphere
for the meeting. Wild swings in Chinese share prices are clearly unacceptable to the regulator. We
prefer to attribute the low volatility in A-shares to the same benign economic prospects facing non-China
stock markets.
………………………………………………………………………………………………………………………………………
5
Bloomberg, SCMP, 30 September 2017.
2
For retail use, October 2017
Overall we remain positive and overweight China in our Asia and global emerging market (GEM)
portfolios, which is a view that a growing number of foreign investors have begun to share with us since
2016. Finally, regarding the Congress itself, we have very little to say. With China equities, we believe it
is a case of "WYSYWYG", or “what-you-see-is-what-you-get.” Post-Congress, we expect to see few
major changes to the economic and financial policies that China has been employing with some
considerable success throughout 2017.
Disclaimer
Manulife Asset Management is the asset management division of Manulife Financial. The information and/or analysis contained in this material
have been compiled or arrived at from sources believed to be reliable but Manulife Asset Management does not make any representation as to
their accuracy, correctness, usefulness or completeness and does not accept liability for any loss arising from the use hereof or the information
and/or analysis contained herein. Neither Manulife Asset Management or its affiliates, nor any of their directors, officers or employees shall
assume any liability or responsibility for any direct or indirect loss or damage or any other consequence of any person acting or not acting in
reliance on the information contained herein.
This material was prepared solely for informational purposes and does not constitute a recommendation, professional advice, an offer, solicitation
or an invitation by or on behalf of Manulife Asset Management to any person to buy or sell any security. Nothing in this material constitutes
investment, legal, accounting or tax advice, or a representation that any investment or strategy is suitable or appropriate to your individual
circumstances, or otherwise constitutes a personal recommendation to you. The economic trend analysis expressed in this mater ial does not
indicate any future investment performance result. This material was produced by and the opinions expressed are those of Manulife Asset
Management as of the date of this publication, and are subject to change based on market and other conditions. Past performance is not an
indication of future results. Investment involves risk, including the loss of principal. In considering any investment, if you are in doubt on the action
to be taken, you should consult professional advisers.
Proprietary Information – Please note that this material must not be wholly or partially reproduced, distributed, circulated, disseminated, published
or disclosed, in any form and for any purpose, to any third party without prior approval from Manulife Asset Management.
These materials have not been reviewed by, are not registered with any securities or other regulatory authority, and may, where appropriate, be
distributed by the following Manulife entities in their respective jurisdictions.
Indonesia: PT Manulife AsetManajmenIndonesia. Malaysia: Manulife Asset Management Services Berhad. Thailand: Manulife Asset Management
(Thailand) Company Limited. Singapore: Manulife Asset Management (Singapore) Pte. Ltd. (Company Registration Number: 200709952G).
Vietnam: Manulife Asset Management (Vietnam) Company Ltd. Australia, South Korea and Hong Kong: Manulife Asset Management (Hong
Kong) Limited in Hong Kong and has not been reviewed by the HK Securities and Futures Commission (SFC). Philippines: Manulife Asset
Management and Trust Corporation Japan: Manulife Asset Management (Japan) Limited. Taiwan: Manulife Asset Management (Taiwan) Pte. Ltd.
(Investment is not protected by deposit insurance, insurance guaranty fund or other protection mechanism in Taiwan. For the disputes resulted
from the investment, you may file a complaint to the Securities Investment Trust & Consulting Association of the R.O.C. or Financial Ombudsman
Institution. License No. 106 Jin-Guan-Tou-Xin-Xin-008 "Independently operated by Manulife Asset Management (Taiwan) Co., Ltd." /6F., No.89,
Songren Rd., Taipei, Taiwan 11073, Tel: (02)2757-5999, Customer Service: 0800-070-998.)
3
For retail use, October 2017
September – An “Indian Summer” for global markets!
Global markets posted strong performance in September driven primarily by
economic fundamentals, with developed markets (DM) taking the lead.
China’s markets have performed well ahead of the upcoming 19th
Communist Party Congress in October, with low levels of volatility. In this
month’s Monthly Macro View, Geoff Lewis leads investors through the latest
market developments.
Review of markets in September 1
In what is usually one of the seasonally weaker months, global stock markets put on another strong
performance in September, chalking up new heights.
The MSCI World equity index rose 2.3% in September, the eleventh successive month of positive
returns. This marked the second longest string of increases since the index began in 1969. 2 Since midAugust the rally has broadened out to include some of the previously lagging sectors, supported by
strong economic data and renewed hopes of tax cuts in America.
Developed markets lead the way
Developed markets (DM) took the lead in September, as MSCI US rose 2.0%, MSCI Europe 3.3% and
MSCI Japan 2.1%. Emerging markets (EM) slipped a little, with a negative 0.4% return. But they
remained firmly in the lead for the third quarter overall, with a gain of 8.0% for EM versus 5.0% for DM. A
stronger world economy is being reflected in more optimistic consensus forecasts of the medium-term
earnings outlook for companies, which we see as having played a large role in the current rally.
The near-term earnings outlook is also promising, as 43 S&P 500 companies have issued positive
earnings guidance well above the 5-year average of 27, and the third highest number for a quarter since
FactSet began tracking earnings-per-share (EPS) guidance in 2006. At the sector level, companies in
the information technology, healthcare, and consumer discretionary sectors account for 39 of the 43
companies issuing positive EPS guidance for the third quarter.
Hong Kong and China equities shine in the third quarter
Turning to Asia, Hong Kong stocks rose another 8.6% in the third quarter of 2017 and are up 30% yearto-date, making Hong Kong's Hang Seng the world's top performing major index, 3 beating Asia exJapan, the US, Europe and EM. A Chinese internet giant accounts for 30% of the Hang Seng's rise this
year. The Boston Consulting Group estimates that China's 710 million internet users spent almost US$1
trillion online last year, with no sign of growth slowing.4 With internet penetration only 52% in China,
………………………………………………………………………………………………………………………………………
1
Manulife Asset Management, FactSet, as of 29 September 2017. Equity indices are calculated in total returns in US dollar.
See Societe Generale, Global Equity Market Arithmetic, 2 October 2017.
See SCMP, 'Hang Seng Index Cuts Above Rivals in Nine Months,' 30 September 2017.
4
SCMP, page B4, 30 September 2017.
2
3
For retail use, October 2017
there is still plenty of room for the market to grow. Chinese IT giants have established network
advantages that will make it difficult for foreign competitors to make significant inroads in the near term.
In Mainland China, the Shanghai Composite Index rose 6.2% in the third quarter, its strongest rise since
the fourth quarter of 2015. Consumer stocks performed well in the third quarter. Mainland stock markets
are closed for the Golden Week public holiday (2 to 6 October) and on re-opening are expected to be in
a 'wait-and-see' mode ahead of the Chinese Communist Party’s 19th National Congress which begins on
18 October. The relative tranquillity of China A-shares is a notable trend.
China A-shares share in the tranquillity
An unusual degree of tranquillity has been a much discussed feature of DM equities in 2017. Perhaps
less commented on is that Mainland China equities – regarded by most western investors as inherently
volatile – has also been enjoying a period of unusually low volatility (Figure 1). Look at the chart and
visually exclude or "take out" the peak in volatility in mid-2015 that accompanied the sharp “patriotic”
rally in stocks. What you see then is a broadly flat volatility trend in Chinese A-shares (SH Composite
Index) for almost 20 years (from 1996 to 2015) averaging around 20% 3-month annualised. Most
recently there has been a move lower to levels not seen since 1992.
5
Figure 1: Shanghai Composite Index 90-day Volatility
One explanation is that the current exceptionally low volatility in Chinese equities reflects the efforts of
Chinese regulators ahead of the key Communist Party congress in mid-October when there will be a
reshuffle of the top leadership. The China Securities Regulatory Commission (CSRC) stated that they
will strive to ensure “stable operations of the capital market” and create a congenial, sound atmosphere
for the meeting. Wild swings in Chinese share prices are clearly unacceptable to the regulator. We
prefer to attribute the low volatility in A-shares to the same benign economic prospects facing non-China
stock markets.
………………………………………………………………………………………………………………………………………
5
Bloomberg, SCMP, 30 September 2017.
2
For retail use, October 2017
Overall we remain positive and overweight China in our Asia and global emerging market (GEM)
portfolios, which is a view that a growing number of foreign investors have begun to share with us since
2016. Finally, regarding the Congress itself, we have very little to say. With China equities, we believe it
is a case of "WYSYWYG", or “what-you-see-is-what-you-get.” Post-Congress, we expect to see few
major changes to the economic and financial policies that China has been employing with some
considerable success throughout 2017.
Disclaimer
Manulife Asset Management is the asset management division of Manulife Financial. The information and/or analysis contained in this material
have been compiled or arrived at from sources believed to be reliable but Manulife Asset Management does not make any representation as to
their accuracy, correctness, usefulness or completeness and does not accept liability for any loss arising from the use hereof or the information
and/or analysis contained herein. Neither Manulife Asset Management or its affiliates, nor any of their directors, officers or employees shall
assume any liability or responsibility for any direct or indirect loss or damage or any other consequence of any person acting or not acting in
reliance on the information contained herein.
This material was prepared solely for informational purposes and does not constitute a recommendation, professional advice, an offer, solicitation
or an invitation by or on behalf of Manulife Asset Management to any person to buy or sell any security. Nothing in this material constitutes
investment, legal, accounting or tax advice, or a representation that any investment or strategy is suitable or appropriate to your individual
circumstances, or otherwise constitutes a personal recommendation to you. The economic trend analysis expressed in this mater ial does not
indicate any future investment performance result. This material was produced by and the opinions expressed are those of Manulife Asset
Management as of the date of this publication, and are subject to change based on market and other conditions. Past performance is not an
indication of future results. Investment involves risk, including the loss of principal. In considering any investment, if you are in doubt on the action
to be taken, you should consult professional advisers.
Proprietary Information – Please note that this material must not be wholly or partially reproduced, distributed, circulated, disseminated, published
or disclosed, in any form and for any purpose, to any third party without prior approval from Manulife Asset Management.
These materials have not been reviewed by, are not registered with any securities or other regulatory authority, and may, where appropriate, be
distributed by the following Manulife entities in their respective jurisdictions.
Indonesia: PT Manulife AsetManajmenIndonesia. Malaysia: Manulife Asset Management Services Berhad. Thailand: Manulife Asset Management
(Thailand) Company Limited. Singapore: Manulife Asset Management (Singapore) Pte. Ltd. (Company Registration Number: 200709952G).
Vietnam: Manulife Asset Management (Vietnam) Company Ltd. Australia, South Korea and Hong Kong: Manulife Asset Management (Hong
Kong) Limited in Hong Kong and has not been reviewed by the HK Securities and Futures Commission (SFC). Philippines: Manulife Asset
Management and Trust Corporation Japan: Manulife Asset Management (Japan) Limited. Taiwan: Manulife Asset Management (Taiwan) Pte. Ltd.
(Investment is not protected by deposit insurance, insurance guaranty fund or other protection mechanism in Taiwan. For the disputes resulted
from the investment, you may file a complaint to the Securities Investment Trust & Consulting Association of the R.O.C. or Financial Ombudsman
Institution. License No. 106 Jin-Guan-Tou-Xin-Xin-008 "Independently operated by Manulife Asset Management (Taiwan) Co., Ltd." /6F., No.89,
Songren Rd., Taipei, Taiwan 11073, Tel: (02)2757-5999, Customer Service: 0800-070-998.)
3