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Quarter-End Insights

Asian Markets Reclaim Lost Territory

During the July-September period, Asia stocks clawed back earlier losses, as stimulus measures gave equities a shot in the arm.

When global policymakers pledged toward the end of last quarter to support their respective economies with stimulus measures, investors were hopeful the coming few months would be eventful.

As optimism over upcoming reforms intensified, prices of riskier assets, including equities, pushed upward in lockstep with improving sentiment. On the other end, however, bears kept feeding doubts into the system: whether governments would live up to market expectations, and if they did, would those measures be enough to put economies back on sustainable growth trajectories?

In between, weak data kept bringing to the fore various challenges confronting the global economy, while at the same time pleading the case for policy measures--it was enough to keep investors on the edge. With bulls and bears both at work, markets followed a choppy path, rallying at one point but quickly slipping back at another, as wary investors took profits before they got wiped away.

When policymakers in the U.S., Europe, China, Japan, and India announced a host of stimulus measures--arguably the most striking development this quarter--most markets in the Asian region sprung back into positive territory.

All the Asian indexes, barring the Shanghai Composite, posted gains between July and September. India's BSE Sensex was up 9.5%, while Japan's Nikkei added 2.5%. Hong Kong's Hang Seng clocked a gain of 8.3%, while Australia's S&P/ASX All Ordinaries edged up 0.5%.

On the other side, the Shanghai Composite dropped 7.2% compared with a loss of 1.6% in the previous quarter. On a year-to-date basis, the index is down 6.5%.

Other markets, however, have retained their year-to-date gains: The Sensex is up a robust 20.2% this year; the Hang Seng has added 12.6%; the S&P/ASX All Ordinaries registered a gain of 8.1%; and the Nikkei has risen 5.9% year to date.

Outside of equities, major commodities also posted impressive performance. Among metals, copper prices rose 8.7%, while gold rallied nearly 12% over the last three months. Crude oil futures gained close to 11% during a rocky period in which they hit a low of $82.12 per barrel on one side and a high of $100.42 a barrel on the other. 

Growth Boosters
It all started when Mario Draghi, president of the European Central Bank, pledged to do "whatever it takes" to protect the euro. Draghi's comments, which were made at an investment conference in London, sent stocks surging and pushed down bond yields in Spain and Italy.

Later in September, the ECB lived up to its promises when it unveiled plans to purchase sovereign bonds of 1- to 3-year maturities with a view to scale down borrowing costs for financially stressed eurozone nations.

Next in line was the U.S. Federal Reserve's announcement of a new round of so-called "quantitative easing." The central bank said it would purchase $40 billion of mortgages every month to shore up the labor market. The bank also said it would keep interest rates at exceptionally low levels at least through mid-2015 and continue Operation Twist to keep long-term rates in check. Stocks across the world soared to multi-month highs as investors hoped the action would infuse additional liquidity in global markets, boosting demand for risk assets such as equities and commodities.

Taking cues from the Fed and ECB, the Bank of Japan extended its asset purchase program by 10 trillion yen, while leaving interest rates unchanged between zero and 0.1%. The Indian government, too, jumped on the bandwagon, putting to rest harsh criticisms of policy paralysis as it unleashed a slew of reforms including relaxation of foreign direct investment norms in the retail, aviation, and broadcasting sectors.

In China, a batch of infrastructure projects were cleared in an orchestrated attempt to revive growth in the world's second-largest economy. Earlier in the year, from mid-May to early July, the government had approved similar projects that included airport and energy-related developments, and had also resorted to rate cuts to spur economic activity. Recently, the People's Bank of China infused a net 365 billion yuan--its largest ever weekly fund injection--into the banking system to ease a liquidity crunch and boost markets.

Sector Performance
In the wake of all these reforms, it isn't surprising to see stocks across all sectors posting gains this quarter.

Among the gainers, health care led the field, followed by telecommunication services and financials.

Japanese drugmaker Astellas Pharma surged over 20% as investors favored defensive stocks over more economically sensitive sectors. India's Cipla Ltd. surged 21.4%, while Lupin added around 12%.

In the telecom sector, Hong Kong's  China Unicom  clocked gains over 30% over the last three months, but the telecom operator is still down 22% on a year-to-date basis. Japan's Softbank Corp added 7.7%.

In financials, banking stocks were up nearly 10% on average.  ICICI Bank (IBN) was up a robust 23.2% in Mumbai and  HDFC Bank (HDB) rose 18.3%.  National Australian Bank (NAB) added 9.2% while  Westpac Banking (WBC) rose around 20% during the period.

Bouncing back from a loss of 17.3% in the previous quarter, the energy sector is now up 8.7%, tracking gains in energy prices. China's largest offshore driller  CNOOC  gained 6.2% during the July-September period, while  China Shenhua Energy (601088) added about 3%.

The materials sector clocked a quarterly gain of 5.7%. On a year-to-date basis, though, the sector is still down 3.4% amid concerns over whether China's stimulus package would be enough to sustain demand for commodities. However, the sector is still better off compared with the previous quarter, when it posted a loss of 8%. Australian mining major  BHP Billiton (BHP) added about 8%, but close rival  Rio Tinto (RIO) slipped about 3.3%.

Beyond Stimulus
As the dust settled on the recent string of policy measures, macroeconomic issues returned to focus, and the stimulus-led rally started to fade as investors doubted if these measures would be sufficient to drive growth.

In the latest sign of flagging demand in Asia, China's manufacturing activity declined for the 11th consecutive time in the month of September, per the preliminary reading of an HSBC survey. Japanese exports dropped 5.8% from a year ago, indicating sluggish demand in the European Union as well as China. Japan's imports dropped 5.4% from a year earlier with domestic demand continuing to remain weak even as deflation continues to plague the economy.

Growth of industrial activity in India has also been anemic--industrial production in the country barely grew in the month of July on the back of sluggish growth in the manufacturing, mining, and capital goods sectors.

Meanwhile, some geopolitical tensions further added to the woes. Japan and China, the two Asian giants, continue to be at loggerheads over a disputed group of islands. With anti-Japan protests flaring up, many Japanese businesses were forced to close shop across Chinese cities, and experts feared the flap could hurt economic recovery in the region.

Concerns about Europe had taken a backseat in wake of the ECB's bond purchase program, but those fears resurfaced after news that German and French leaders disagreed over the timetable to initialize a centralized banking supervision, and after Spain showed reluctance to request a formal bailout. Further, uncertainty in Spain and Greece continues to loom large with widespread protests against proposed austerity measures further casting doubts as to how, going forward, Europe would tackle its long-drawn debt crisis.

Now that policymakers have already delivered the goods, markets are likely to be once again influenced by fundamental macroeconomic factors and, more importantly, how events unfold in Europe and the potential repercussions on industries inside and outside the region.

Gazala Parveen does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.