Country Updates

For the month ending April 2012

China/Hong Kong

Chinese stocks showed strong performance in April. The MSCI China Index surged 3.47% (3.55% in U.S. dollar terms), Hong Kong's Hang Seng Index rose 2.70% (2.78% in U.S. dollar terms) and China's domestic A share index gained 7.02% (7.04% in U.S. dollar terms). China's currency, the renminbi, ended the month at 6.28 renminbi against the U.S. dollar. During the month, the central bank widened the daily currency trading band from 0.5% to 1%.

China's GDP grew 8.1% from a year ago in the first quarter, down from its 8.9% level at the end of last year. The growth was weaker than expected due to a slowdown in exports and continued weakness in the property market. However, the economy’s growth drivers seem to have shifted. Consumption contribution to GDP growth increased to 76% in the first quarter from 52% in 2011. Meanwhile, investment contribution fell to 33% from 54%.

Inflation in March was higher than expected. The consumer price index rose 3.6% from a year ago, compared to 3.2% during the previous month. However, the producer price index fell -0.3% in March, after being relatively flat in February.

Macroeconomic data continued, to point toward a gradual moderation in economic activity. Industrial production growth came in at 12% in March, while retail sales grew 15% from a year ago. Import growth slowed to 5% in March, while export growth slowed to 9%. The Purchasing Managers Index, an indicator of manufacturing activities, was approximately 53 in April, a slight improvement from the prior month.

India

In local currency terms, the Bombay Stock Exchange 100 Index declined -0.88% in April, (-4.18% in U.S. dollar terms). Consumer staples did well, whereas telecom was among the worst performing sectors. Initiatives changing the tax code for overseas takeovers, announced last month, appear to have adversely affected foreign investor sentiment. Standard & Poor’s revised its outlook for India to negative. April brought US$206 million in foreign institutional outflows versus inflows of US$1.68 billion in March (and aggregate inflows in the first four months of 2012 of US$8.64 billion).

The earnings season for this quarter began in April and results have been mixed. Other than financial services, consumer staples and technology, other sectors have experienced profit margin contraction. In the financial services sector, nonperforming assets are still a concern. However, private banks have been more successful in containing credit costs than their public sector peers. The central bank surprised everyone by delivering a rate cut of 50 basis points (0.50%), despite continuing inflationary pressures. This should provide a tailwind initially to the financial services sector and then extend to other sectors in the economy. However, high oil prices might constrain further rate cuts in the near term.

Japan

Following positive performance for the first quarter of 2012, the Tokyo Stock Price Index (TOPIX) lost 5.86% in local currency terms (3.32% in U.S. dollar terms) in April. The yen strengthened by 3.68% against the U.S. dollar, ending the month at 79.82. This is the first time the yen has dipped below 80 since late February. This decline is partially due to the Bank of Japan’s failure to meet market expectations for a further easing in monetary policy. However, increasing uncertainties over economic recovery in the U.S. and rising concerns about Europe’s fiscal condition perhaps played a bigger role in a strong yen.

All TOPIX industry groups declined this month, although small services companies performed relatively well. These companies focus on niche domestic businesses that tend to be less affected by global economic turmoil. Software companies also performed better than the broad index thanks to the gradual recovery in information technology spending among Japanese corporates. Conversely, the steel industry was the worst performer given continued sluggish demand in China. Exporters such as auto and consumer electronics makers also underperformed this month due to the strengthening of the yen.

Japanese companies also began to report earnings for the fiscal year ending March 2012. Tokyo Keizai, a leading institute that surveys company earnings estimates, projects that the combined net earnings of the Tokyo Stock Exchange’s first section companies (excluding financials) will increase by 78.65% in March 2013 after falling by 33.54% in March 2012. However, the outlook provided by Japanese management may actually be weaker than this given the rising uncertainty in the global economy. This could hurt sentiment and put pressure on stock performance in the short term.

Korea

During the month, the Korea Composite Stock Price Index declined -1.59% in local currency terms (-1.42% in U.S. dollar terms). The Korean Securities Dealers Automated Quotations Index declined -7.83% in local currency terms (-7.67% in U.S. dollar terms) thanks to a slight appreciation of the Korean won against the U.S. dollar. The Bank of Korea’s Monetary Policy Committee again left its policy rate unchanged at 3.25%, and the consumer price index for the month rose 2.5%, which was within the central bank’s inflation target, and a little lower than the previous month.

Trade data through most of April slowed somewhat. Both exports and imports showed year-over-year declines, with exports falling 4.7% to US$46.3 billion and imports down 0.2% to US$44.1 billion. This left a trade surplus of US$2.2billion. By region, exports to the European Union and Japan were particularly weak, down 17% and 11%, respectively. Conversely, exports to all other regions showed gains. Major national champions in auto and IT industries surprised the market after coming up with stronger than expected first quarter results as they kept gaining market share with improved profitability.

During the month, South Korea’s ruling party maintained control of Parliament in a surprise general election victory, securing a majority of the seats in the National Assembly. Political analysts commented that the party has successfully distanced itself from current President Lee Myung-bak, whose approval rating has been plummeting. While conservative by nature, the ruling party has matched its liberal opponents by taking a similar stance on welfare spending as liberals.

April 2012