June 2010

The MSCI World fell 9.48 per cent in USD terms. News flow was dominated by continued worries over the European peripheral countries and how their difficult fiscal positions may impact the euro.

Other concerns included China and the impact of government attempts to slow the Chinese property markets.

Geographically, Europe saw the greatest falls, with the MSCI Europe index down 11.96 per cent in U.S. dollar terms, while the United States fell 8.06 per cent, the least amongst the major markets.

The best performing sectors over the month were the more defensive sectors such as consumer staples and telecommunication services, down 6.49 per cent and 7.22 per cent, respectively. The worst performing sectors were energy (-11.85 per cent) and financials (-11.41 per cent). The energy sector performed poorly, due to a weakening oil price and the worsening situation surrounding the Gulf of Mexico oil incident, while the financials sector suffered from worries over exposure to the weaker European countries such as Greece and Spain.

Following the sharp falls over the last month, markets could see a short-term recovery from over-sold levels, though the medium-term outlook is likely to remain volatile.

North America

Further concerns over Greece spilled over to other European countries with similar issues, most notably Spain. This dragged U.S. equities downwards. 

With investor fear mounting and growth targets for the Eurozone being cut, the damage spilled into the U.S., as investors took a dim view of any U.S. companies that generate a meaningful portion of their earnings from European operations. 

Meanwhile, the massive oil spill in the Gulf had a dramatic effect on the entire energy complex, moving well beyond the few names directly involved in the spill.  There is growing concern that the spill may begin to impact shipping in the region, along with the devastating economic impact it has already had on fishing in the region. 

The stock market has come a long way from the lows of March 2009, and a pullback was not entirely unexpected.  At the end of May, the valuation of U.S. stocks has improved and corporate profits continue to rise at an impressive rate. 

Europe (Developed)

MSCI Europe index was down almost 12 per cent in U.S. dollar terms. The month was notable for the return of risk aversion, with investors becoming increasingly mindful of the risks of a double dip recession as one country after another announced austerity programmes.

Banks saw funding costs rise and interbank liquidity weakened, particularly for those with exposure to southern Europe. Indeed, so great were these concerns that the European Union fashioned a €750bn rescue package of loans and guarantees and announced that the European Central Bank (ECB) would begin buying the government debt of southern European countries such as Greece.

Unsurprisingly, the euro was very weak amid the European turmoil, declining by 7 per cent, to hit a one-year low against the dollar.

After the sharp fall in the euro, European exporters should get a welcome competitive boost, thereby helping to bolster growth in the region as austerity packages come into force. In addition, the recent decision by the ECB to purchase government bonds is a departure from its previous hard line stance and we believe an accommodative monetary policy will be maintained for some time. This should be supportive of equity market valuations.

Japan

Both the TOPIX and Nikkei 225 indices declining over 10 per cent in local currency terms on concern over European countries’ debt problem becoming a burden.

Beneficiaries of the strong yen, such as pulp & paper, also outperformed the broad market, as the yen strengthened against major currencies during the month.  In contrast, financial shares, including real estate, performed poorly on negative news regarding financial troubles in Europe.

Early June saw the resignation of the Japanese Prime Minister Yukio Hatoyama.  The aim was to limit the damage from recent weak ratings ahead of the coming upper house election.  With the Hatoyama cabinet’s policies, such as favouring larger government, being stock market-unfriendly, this move may eventually turn out to be positive. 

With the Democratic Party of Japan in a weakened state and more parties are keen on structural reform, including deregulation, it may have influence on government policies after the election, which is likely to be taken positively by the stock market.

Asia Pacific ex Japan

Regional Asian markets followed global peers in experiencing a heavy decline during May, on rising concerns over the potential spread of defaults in southern Europe. Global concerns over the debt problem in Greece and its possible contagion resulted in some volatility in markets across the globe and also affected the Asian region.

Despite this, earnings announcements and economic data in Asia have continued to show positive signals on the state of the recovery and breadth of growth.

The better performing markets across the region during the month were Thailand and the Philippines, while Korea and Taiwan lagged the rest of the region, with all markets ending the month in negative territory. In sector terms, the utilities and telecommunications sectors outperformed, while the materials and the financials sectors lagged.

Valuations across the region have corrected to trade now slightly below long-term fair value, following the decline in May. The overall outlook for the equity markets remains positive, and company guidance and operating conditions continue to improve, and institutional investors may look for opportunities to accumulate equity positions as valuations have moderated.

Emerging Markets ex Asia

Hungarian markets suffered particularly harshly as the new government chose to highlight the poor state of the finances inherited from the previous administration and although intended for a domestic audience, international investors inevitably took fright at the mention of the possibility of a default.

There was more stability elsewhere, with the Russian stock market holding up relatively well despite its perceived sensitivity, largely via the oil price, to external factors. It was helped by positive economic news, with industrial production up 10.4 per cent over the year to April for example, as well as a further cut in interest rates.

Although the immediate outlook for the region remains uncertain, given the current travails of the eurozone, eastern European economies are in relatively good shape and their companies are performing well.

Latin America equity market (MSCI Latin America 10/40) went down in May by 8.10 per cent, outperforming the Emerging Markets Free index (-8.75 per cent) and the MSCI World index (-9.48 per cent).

Brazil was hardest hit given its commodity exposure and higher liquidity, while Peru, Chile and Colombia proved resilient and outperformed.

Sources:
MFC Global Investment Management (U.S.), LLC 
Manulife Asset Management (Hong Kong) Limited
Charlemagne Capital (UK) Limited
(as of May 30, 2010)




Important:
Investment involves risks. Fund prices may go down as well as up. Past performance figures shown are not indicative of future performance. Investor has his/her own personal investment objectives, investment products may not be suitable for everyone. Investors should not invest on the investment product solely based on this material.
Investments in the emerging markets may be subject to special risks and the risks could be substantially higher than the risks normally associated with the world's more established stock markets.
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This material has not been reviewed by the Securities and Futures Commission (SFC).
Issued by Manulife Asset Management (Hong Kong) Limited