Half-year mark: Taking stock of the market

July has arrived, so it's time to take stock of how markets fared around the world in the first six months of a year that started on the wrong foot.

Our report card will assess some of the top-performing share markets in the first half of the year, including the somewhat surprising leading trio of Brazil, Russia and Thailand, and those at the bottom such as Hong Kong, China and Europe.

Mr Ho Song Hui, assistant director of research and content at unit trust platform Fundsupermart.com, says: "Global equity markets staged a strong rebound in the second quarter of 2016, only to see the results of the referendum on Britain's European Union (EU) membership halt the advance."

Before Britain's decision to leave, he says, major regional markets had made strong rebounds after taking a huge hit in the first six weeks of 2016. The United States was down just 2.3 per cent from the start of 2016 to June 23, while Europe had recovered from 15.1 per cent down to 6.5 per cent, and Japan reduced its losses from 17.4 per cent to 7.9 per cent, Mr Ho adds.

But Brexit gave the markets a beating.

Mr Ho notes that the pound lost 6.7 per cent against the Singapore dollar while European equities tanked 8 per cent on June 24.

He added that while financial assets were repriced and volatility hit the markets, by the end of June they seemed to have recovered.

Most major regional markets saw only minor changes in their performance, apart from Europe.

As well as running the rule over the winners and losers, experts have given The Sunday Times their take on what they expect the second half of the year to look like, as they brace themselves for the unexpected.


Brazil, Russia and Thailand took the top spots, with Mr Ho noting that they are all emerging markets.

A deeper look shows that Brazil's equity market was sent into a frenzied rally, with the benchmark Bovespa Index surging 40.7 per cent in Singdollar terms over the first six months of the year.

Mr Ho says this led Brazil to "top the list of equity markets under our coverage as the Brazilian Senate approved the impeachment motion against President Dilma Rousseff, paving the way for her permanent removal from office".

And after falling to its lowest level in two decades last year, the Brazilian real has since recovered strongly as political uncertainty dissipated.

Fundsupermart also noted that Brazil extended its gains from the previous quarter, with an 11.7 per cent appreciation against the Singdollar, to contribute to overall gains in the first six months.

However, Mr Ho notes that despite the Bovespa Index's spectacular first-half performance, Brazil's economic data has not been encouraging. Its economy has spiralled deeper into recession, with the first-quarter gross domestic product declining 5.4 per cent year on year.

He says: "With markets having priced in a change of government and looking beyond the political turmoil, the investment case for Brazil now hinges on its economy, which is not showing signs of a quick recovery.

"As such, we downgraded Brazil's equity market from four stars and 'Very Attractive' to three stars and 'Attractive' over the course of the second quarter."

Russian equities, represented by the RTSI$ Index, posted a 17.2 per cent gain over the first half of 2016. In local currency terms, the index was up 6.2 per cent, with the rouble rallying against many currencies alongside the rebound in crude oil prices.

Fundsupermart noted: "The rouble is 14.1 per cent higher against the US dollar and 8.8 per cent higher against the Singdollar in the first six months.

"In that period, companies like airliner Aeroflot were some of the top-performing stocks, with its share price rallying more than 44 per cent year-to-date."

Thailand was also a bright spot. "While most of the markets under our coverage struggled to stay in green over the past six months, Thai equities seemed to be doing so with ease," says Mr Ho.

After a 6.8 per cent gain in the first three months of the year, Thailand's SET Index posted a return of 2.7 per cent during the second quarter.

Its equity market made a 9.8 per cent gain in the 12 months to June 30 to continue as one of the top contenders on the performance ladder, says Mr Ho.

He adds that better-than-expected GDP data was helped by a significant growth in government spending, with the GDP component expanding at a whopping 8 per cent year on year, compared with the previous quarter's 4.8 per cent.

However, Mr Ho notes that the valuation metric showed the Thai equity market is "by no means attractive". The SET Index was trading at a price-equity (PE) ratio of 15.6 times as at June 30, which is significantly above Fundsupermart's fair PE estimate of 12.5 times.

"We continue to remain vigilant on the market's deteriorating earnings estimates and the growing discrepancies between surging price and deteriorating corporate earnings of Thai equities," says Mr Ho.


The European equity market was hit hard after the Brexit decision, with the European Stoxx 600 index losing 8 per cent of its value on June 24 alone.

However, even though European equities ended the first half of 2016 as the worst-performing market under Fundsupermart's coverage, with a loss of 12.5 per cent, it has still managed to "claw back some ground from its 17 per cent low on Feb 11, although it is 10.5 per cent away from its year-to-date high", it noted.

Mr Ho says: "The fallout of Britain's decision will take some time to be fully known. For now, we see heightened downside risks to Britain's economy, the pound, British equities and corporate bonds.

"Given that the economy is expected to weaken, the Bank of England is likely to have to cut rates or restart its quantitative easing programme, all of which are likely to add downward pressure on the pound, while a weaker economy should spell negative news for British risk assets."

Fundsupermart also noted that after the disappointing performance in the first quarter, Chinese equities - as represented by the Hang Seng Mainland 100 (HSML100) index - ended the first half with a loss of 10.9 per cent.

Mr Ho notes that heightened concerns over slowing economic growth, and the credit quality deterioration in sectors with overcapacity were the key risk factors leading to a plunge in Chinese equities in the first half.

"The default of a state-owned enterprise (SOE), Dongbei Special Steel, spiked risk-off sentiment for investors at the end of March. The default may have a symbolic meaning to the market as SOE bonds may no longer be guaranteed by the government."

However, he notes that while recent news may focus on the downside of China, the 12th Annual National People's Congress meeting held in March revealed efforts and plans to aid the economy for the next five years.

"The economic growth target was set at a range of 6.5 to 7 per cent, with the tertiary service sector targeted to contribute more to the economy."

The Hong Kong market also continued to be one of the more unpopular among global investors, says Mr Ho, with the benchmark Hang Seng Index posting a 9.8 per cent drop in returns as of June 30, as the shadow of China's slowing economy hangs over it amid fears from Brexit.

Mr Ho adds that among the 50 constituents of the Hang Seng Index, those with larger British exposure such as HSBC, CK Hutchison Holdings and Power Assets Holdings suffered after the Brexit decision.

"Although the negative sentiment of Brexit may have been digested in the short term, investors should be aware of negative impacts on financial institutions, like HSBC and Standard Chartered, with British links," he says.


Fundsupermart.com senior analyst Kean Chan notes that just like at the end of the first three months of the year, gold-related equities continued to rally in the second quarter as prices moved higher by 7.9 per cent in United States dollar terms, spurred by concerns over Brexit.

The NYSE Gold Bugs Index - which is representative of the universe of gold-related stocks - posted a 37 per cent increase, in US dollar terms, in the second quarter.

Fundsupermart said funds that invested in gold-related companies enjoyed stellar performances as share prices rallied over the quarter, helping to boost overall returns.

Gold equity funds like the Investec Global Strategy - Global Gold Fund posted a return of 86.7 per cent in the first half while Deutsche Noor Precious Metal Securities advanced 86.5 per cent.

Mr Chan says there were also decent gains in other commodities over the second quarter, which has helped to boost the share prices of resource companies.

The BlackRock Global Funds - World Mining Fund (Singdollar-hedged) recorded a gain of 38.69 per cent, while Allianz Global Metals and Mining posted a 25.73 per cent gain.


Mr Chan says: "Fixed-income markets, as a whole, continued eking out gains in the second quarter, outperforming equity markets as the higher-quality segments benefited from bouts of risk aversion in financial markets worldwide."

The average bond fund - FSMI All Bond Index - on Fundsupermart posted a 1.94 per cent gain in the second quarter, and a return of 2.53 per cent over the first half.

Mr Chan adds: "Many emerging-market bond funds were found at the top this time round, and they included both bond funds that are invested in both hard and local currency-denominated issues."

Fundsupermart data showed the average emerging-market bond fund performed well in the second quarter, ending with an average gain of 5.65 per cent in the first six months.

The US dollar continued to weaken broadly against many currencies over the second quarter, losing some ground against various emerging-market currencies like the Russian rouble, the Thai baht, the Indonesian rupiah and the Brazilian real.

Mr Chan says: "This has helped boost the performance of some of our bond funds that are invested in local-currency debt issues."

Emerging-market bond funds like Neuberger Berman Emerging Market Debt - Local Currency Fund (Singdollar-hedged) posted a 17.74 per cent gain, and PIMCO Global Investors - Emerging Markets Bond Fund (Singdollar-hedged) added 12.18 per cent in the first six months.


Experts agree that there will still be uncertainty as markets reel from the immediate after-effects of Brexit.

Mr Dharmo Soejanto, multi-asset strategy director at UOB Asset Management, says: "The reassessment of the relationship between Britain and the EU could result in various possible outcomes, which means market volatility will likely remain.

"If global economic growth is seen to be relatively unscathed by the referendum, we believe that markets could begin to perform after adjusting for Brexit."

He notes that oil prices have already recovered to levels seen in the fourth quarter last year, meaning that the drag from falling oil prices and the energy sector on earnings growth would begin to fade, going into the fourth quarter.

"We believe markets would move higher in line with the recovery in global earnings," he adds.

Mr Sean Quek, Bank of Singapore equity research head, says the bank has lowered global equities from neutral to underweight, given higher political risks and demanding valuations. He also lowered Europe to underweight in favour of the US, "which is enjoying solid growth and is more resilient during periods of turbulence". Mr Quek's preferred global sectors include consumer discretionary, healthcare, technology and telecoms.

Mr Ho adds: "The short-duration bond segment and US high-yield bond segment continue to be our preferred fixed-income segments, with the former offering investors an anchor of stability with decent yields, and the latter, the ability to boost the overall yield profile for an investor's portfolio."

This article was first published on July 10, 2016.
Get a copy of The Straits Times or go to straitstimes.com for more stories.