China/Hong Kong

In September, the MSCI China Index returned -1.70% and Hong Kong's Hang Seng Index returned 0.05%, both in local currency terms. China's domestic CSI300, the A share index, returned 3.23% in local currency terms (2.77% in U.S. dollar terms). The renminbi (RMB), ended the month at 6.87 against the U.S. dollar.

Chinese shares suffered in September as significant headwinds surrounding trade and tariffs proved to be too large a risk for investors during the month. The U.S. seemed keen to escalate the size and scope of tariffs and announced fresh taxes on US$200 billion worth of Chinese imports. China immediately retaliated with tariffs worth US$60 billion on U.S. goods, which has ultimately led many market participants to believe trade issues will impede markets and contribute to uncertainty for months to come. However, there are potential green shoots in China: resilient corporate earnings, a reasonably stable currency, a government willing to re-stimulate the economy as needed and a market that has already priced in the significant fallout from trade disputes. These may all contribute to potential stability in Chinese equities. In addition, MSCI announced that it is considering significantly increasing the weight of China A-shares within its global indexes next year.

India

In September, the S&P Bombay Stock Exchange 100 Index returned -9.39% in U.S. dollar terms (-7.24% in local currency terms).

India's equity market gave up most of its year-to-date outperformance in September 2018. Investors had viewed India as a safe haven from tariff-related volatility while GDP growth rebounded and the negative effects related to India's Goods and Services Tax abated. Macroeconomic headwinds along with expensive relative valuations, however, hit investor sentiment in September. A weaker rupee along with increased inflationary pressures forced the Indian central bank (RBI) to raise rates and tighten policy. Oil prices spiked in early September and continued to grind higher throughout the month increasing the current account deficit and speculation of a weaker currency. Higher bond yields have lessened the relative attractiveness of equities and the prospect of increased inclusion of Chinese A-shares within certain emerging market benchmarks may lead to a lower absolute weight of Indian equities. One positive is that local investors seem keen to add equities as a means to diversify outside their real estate and gold holdings. The local mutual fund industry is growing and local demand seems likely to continue over the long term.