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Phillip: 6 Sectors to Avoid In China, Singapore and Indonesia
Aspire | 25 November 2015
By: Lim Si Jie
Articles (169) Profile

Asian markets have been hit by an onslaught of recent waves of bad news as primary concerns in the US and China continue to fuel market volatility.

Growth forecasts (for 2015 and 2016) by the US Federal Reserve, International Monetary Fund (IMF), Organisation for Economic Cooperation and Development (OECD) and World Bank have been continually downgraded, adding concerns to the sluggish global economy. On top of slower global growth, a stronger USD also remains a key concern among investors.

Source: Bloomberg

Overall, manufacturing activity in the Asian region remained weak as compared to the Developed Markets. The weak manufacturing PMIs reflect sluggish demand, both domestic and foreign.

Phillip highlighted certain sectors that investors should avoid in the Asian market following the possible slowdown in many developing Asian economies.

China: Central Government Trying Its Best to Revive Economy and Markets  

The overall sentiment remains bearish as the Chinese central government failed to revive investor confidence via a raft of stimulus measures which include:

  1. Continuous cut in both interest rates and required reserve ratio (RRR),
  2. Renminbi devaluation and new price-fixing mechanism and
  3. Boosting liquidity in the system by allowing local pension funds to invest up to 30 percent of their net assets in stocks, equity funds and balanced funds (previously could invest only in bank deposits and Treasuries).

Investors Takeaway: Avoid Manufacturing, Automobile Sector

However, a major concern remains as China’s official manufacturing PMI dipped further into contractionary territory (below 50). Meanwhile, the services sector grew slower than expected despite remaining well above the 50-point level.

In the waning automobile sector, car sales were flat in the Jan-Aug period and it seems like it is heading to its first contraction since the 1990s in this year. Acknowledging such a weakness, China has halved its car sales tax to boost its sagging demand.

Singapore: Double Whammy OF External and Internal Headwinds

Singapore continues to feel the pinch from lacklustre external demand and domestic constraints on higher costs and tight labour market. Knock-on effects from regional slowdown raised red flags in PMIs and NODX, implying a looming technical recession.

MAS may tweak the monetary policy in light of China’s new RMB fixing mechanism and weaker regional currencies. Deflationary trend of the RMB is expected to persist, providing more scope for the central bank to weaken SGD.

Investors Takeaway: Avoid Hospitality Sector and Manufacturing Sector

The manufacturing sector has already contracted in ten of the past twelve months. The weak data in PMIs are also signs of Singapore losing its competitiveness as SGD remains relatively stronger against its peers, including Taiwan, South Korea and Japan.

Prolonged haze pollution could hurt tourism industry, airlines services, outdoor entertainment businesses and other hospitality businesses. It could also raise business costs due to disruptions to air travel, health expenses.

Indonesia: Economy In Need Of Saving

2Q15 GDP growth remains soft due to lower public consumption and investment (4.7 percent year-on-year in 1Q15 and 2Q15). Stimulus package covering fiscal issues, investment deregulation, energy problems and food has been announced to revitalise the economy and stem the plunging rupiah. Part of the stimulus package includes:

  1. Interest tax cuts for exporters, fast-track business licensing for major investments in industrial estates and relaxation of taxes for the import of capital goods and the aviation industry.
  2. Expansion of the government-sponsored micro-loan (KUR) program and KUR interest rate cut to help small businessmen get funds.

Investors Takeaway: Avoid Commodity, Consumer Discretionary Sector

In light of the low commodity prices and soaring inflation, consumer confidence has been on a downward trend since January. There are still no signs of commodity prices recovery in the near term.

A point to note is that investors should also avoid highly leveraged companies.

In view of the falling rupiah, Indonesian companies who took advantage on the cheap external debt are facing mounting liquidity pressure. Overall, Indonesian companies are bound to roll over more than US$42 billion of foreign currency loans within the next 12 months.

Si Jie is no stranger to investing having started his journey at a young age. He is heavily influenced by acclaimed investors such as Benjamin Graham, Peter Lynch, and John Rothchild.

Please click here for more information about this author.

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