MSCI China returned -14% in May as changes in the market narrative triggered a shift towards risk-off sentiment, with negative implications for equity prices. Domestically, concerns centred on a potential China policy stimulus fade-out following high level comments that deleveraging and risk prevention would be maintained, predicated on a stronger than expected showing in economic data. Externally, geopolitical tensions were reignited following US President Trump’s escalation of the trade war with China just days before an anticipated ‘deal’ between the two countries was due to be signed.
Trump’s move included the raising of tariffs on US$200 billion equivalent of Chinese goods effective May 10, and a threat to impose 25% tariffs ‘shortly’ on a further US$325 billion equivalent of - as yet untaxed - Chinese goods. In addition, Trump signed an executive order to restrict US business (both procurement and sales) with Huawei, a move that is set to have far-reaching negative ramifications for the technology sector.
The net effect of these developments has been a swift derating of equity prices as investors reassess both the prospects for China’s short- to medium term growth outlook and the prospects of a full-blown trade war.
MSCI India returned 0.22% in May, significantly outperforming the Asia region. India’s Nifty Index briefly touched new all-time highs in local currency terms as political uncertainty was lifted with Prime Minister Modi re-elected with an absolute majority, thus ensuring policy continuity. Indeed, the result marked the first consecutive majority for an incumbent party since 1984, wrong-footing the bulk of the political analyst community in the process.
Having expected Modi to form the next government but with a reduced number of seats, markets began repricing a far more positive outcome in the fortnight leading up to the election result, announced 23 May. With the bulk of disruptive reforms now behind the ruling BJP (including, but not limited to; demonetization, the Real Estate Regulation and Development Act, the bankruptcy law and GST implementation), the government’s focus is expected to shift to growth.
This is particularly prevalent given the slowdown in India’s growth trajectory over the past five years, with government facing questions about the related issue of insufficient job creation (unemployment is currently at decade-old highs).