January 2010

Market Review and Outlook

The MSCI World Index rose by 1.83 per cent over the month, ending the period close to the high for the year. From a geographic perspective, the Pacific Rim was the best performing region, rising by 2.29 per cent, while Japan continued to lag the other regions, rising by 0.72 per cent over the month.

The best performing sectors during the month were information technology and consumer discretionary, which rose by 5.65 per cent and 3.95 per cent, respectively. The worst performing sectors were financials, which declined by 1.18 per cent, telecom services and consumer staples, which rose by 1.02 per cent and 1.03 per cent, respectively.

The combination of a stronger U.S. dollar and higher yields resulted in a poor month for global government bond performance.  Credit spread tightening and higher current yields delivered another month of strong relative performance for corporate issues.

Following the strong performance from equity markets since the start of the rally last March, a period of more stable markets is anticipated, with more balanced performance between cyclical and defensive sectors, as stock-picking becomes a bigger driver of returns.

North America

Although the pace of gains declined in the fourth quarter, U.S. stock markets still posted solid positive returns.  December economic data still showed some challenges ahead, but there were further signs of improvement.

Evidence is now reasonably clear that the recession ended in mid-2009; however, economic statistics released late in the year may indicate that the recovery could be losing momentum.  Specifically, consumer confidence, wages and income all flattened out; employment has improved markedly, but was still negative at the end of the year. 

From an economic perspective, we feel that we will see continued growth in 2010, but the pace of that growth will be slower than we would expect after such a severe recession.

From a stock market perspective, after the significant move we saw in 2009, the next leg up will be driven by earnings growth.  Earnings are expected to be up 25 per cent to 30 per cent in 2010 versus 2009.

Europe (Developed)

The MSCI Europe index notched up a 1.52 per cent gain in December in USD terms. Positive economic data in the U.S. and Asia set the stage for increased optimism in European markets.

After the strong recovery in equity markets from the March lows, we feel that valuations are now at best reasonable.  However, after a ‘lost’ decade for returns, equities could still advance in the medium to long term, as equity risk premiums remain elevated compared to historical levels.

Japan

The Japanese stock market rose for the first time in four months, with the TOPIX index advancing 8.1 per cent.  The market rallied sharply, supported by further monetary easing by the Bank of Japan, which caused the yen to depreciate. 

With regard to sector movement, the weak yen beneficiaries, such as the automobiles and electronics, outperformed the broad market.  In contrast, domestic demand-related sectors underperformed, as these sectors will be negatively affected by the weak yen.  Banks were also weak as concern of tighter regulation on capital requirement may result in further issuance of equities.

The Japanese equity market has been underperforming within the global market over the last several months on various Japan-specific negative factors.  As most of these negative factors have either gone or been priced in, we are looking for a stable market ahead, making up for recent underperformance.  There are two sectors in particular where we expect to see positive news ahead: one is the automobile market, which is recovering globally after a sharp drop in early 2009, and the other is the technology sector, where demand growth continues in the emerging countries. 

Asia Pacific ex Japan

The better performing markets across the region during the month were Taiwan, Korea and Thailand, while China and Malaysia lagged the rest of the region. In sector terms, the information technology and consumer discretionary sectors outperformed, while telecommunications and consumer staples lagged.

MSCI Taiwan was the best performing market in the region, with a gain of 8.5 per cent during the month. The best performing sectors were industrials and technology. The outperformance in the tech sector was primarily driven by seasonal factors as well as stronger DRAM and LCD panel prices.

The MSCI Australia Index rose 1.6 per cent in December. Materials and industrials sectors performed strongly, driven primarily by both major miners, BHP and RIO, as the outlook for global growth, and hence commodity prices, continued to improve.

Overall outlook for the equity markets remains positive and company guidance and operating conditions continue to improve.

Emerging Markets ex Asia

Eastern European stock markets were stronger again in December, supported by the expectation that the recovery in economic activity that is already underway across the region would become more pronounced over 2010. The Istanbul stock market was up some 20 per cent following indication that an IMF Stand-By Arrangement may be agreed over the short term. Turkish financial stocks were especially strong as a result. The outlook for Eastern European markets remains encouraging despite the share price gains secured over 2009. Economic recovery is not as advanced as elsewhere and interest rates have yet to bottom out in some countries. Valuations remain reasonable on both an historic and regional comparison, whilst a return of corporate activity highlights the number of investment opportunities available.

Latin America equity market (MSCI Latin America 10/40) rose 2.82 per cent in December, underperforming the Emerging Markets Free index (up 3.96 per cent) but overperforming the MSCI World index (up 1.83 per cent). December was another positive month for equity markets mostly influenced by positive economic data coming out of the United States and China, leading commodity prices upwards (up 2.69 per cent for Oil; Copper up 6.46 per cent and Nickel 12.96 per cent). Markets also bounced back due to positive indications coming out from Middle East with Abu Dhabi providing a loan to Dubai. Finally the first indications are that Christmas sales in 2009 were excellent within the region, especially in Brazil.

Sources:
MFC Global Investment Management (U.S.), LLC 
Manulife Asset Management (Hong Kong) Limited
Charlemagne Capital (UK) Limited
(as of December 31, 2009)




Important:

Investment involves risks. Fund prices may go down as well as up. Past performance figures shown are not indicative of future performance. Investor has his/her own personal investment objectives, investment products may not be suitable for everyone. Investors should not invest on the investment product solely based on this material.

Investments in the emerging markets may be subject to special risks and the risks could be substantially higher than the risks normally associated with the world's more established stock markets.

Any views and facts provided in the document are for information only and do not constitute any investment, tax or legal advice.

This material has not been reviewed by the Securities and Futures Commission (SFC).

Issued by Manulife Asset Management (Hong Kong) Limited