Market Highlights

Relief from rate hike worries provided an impetus to Asian markets on Wednesday. The mainland bourses were among the best performing, benefiting the local market with the HSI staging a 362-point or 1.7% gain to a new high in nearly two months. The H-shares index rose a more spectacular 2.4%, slightly outperforming the CSI 300's 2.2% advance. Financial and property counters were among the day's most robust players. Geographically, mainland financials and local property stocks were relatively stronger than their counterparts across the border. After the brief setback on Tuesday, Sun Hung Kai Properties (0016.HK, $118.90, BUY) bounced back 4.0%, making it second only to CHALCO (2600.HK, $8.17, BUY) as the top performer among HSI constituents. SHKP benefits from the extended low-interest-rate period as well as the strong demand for its branded properties in Hong Kong and the mainland. For CHALCO, the outlook of a positive profit turnaround this year and its planned A-share issuance to raise up to Rmb10b, to expand its alumina production capability, were the stimuli. Between the Federal Reserve's Open Market Committee meeting in January and its second one on Tuesday, it is reckoned that economic activity in the US has continued to strengthen as the labor market stabilizes. Household spending is expanding at a moderate rate but remains constrained by high unemployment, modest income growth, lower housing wealth and tight credit. Business spending on equipment and software has risen significantly. Although the pace of economic recovery is likely to be moderate for a time, the committee anticipates a gradual return to higher levels of resource utilization in a context of price stability.

The FOMC will maintain the target range for the federal funds rate at 0-0.25% and continues to expect economic conditions, including low rates of resource utilization, subdued inflation trends and stable inflation expectations, to likely warrant exceptionally low levels of the federal funds rate for an extended period. In light of improved functioning of financial markets, the Federal Reserve has been closing the special liquidity facilities that it created to support markets during the crisis. All but one of the ten FOMC members voted for the monetary policy action despite growing concerns that the ultra-low interest rate environment may contribute to the buildup of financial imbalances and increase risks to longer-run macroeconomic and financial stability.

Despite the strong auto sales in China last year, the earnings setback reported by Denway Motors (0203.HK, $4.10, HOLD) came as a surprise. This was one of the few earnings disappointments of the current reporting season. The company reported a 9% drop in net profit to $1.9b for FY09, largely because of the production constraint at its motor vehicle assembly joint venture set up in Guangzhou with Honda. Last year, passenger vehicles sold in mainland China reached 10.3m units, up 53% yoy; whereas, Denway's auto joint venture only sold 365,623 units in 2009, up 19% yoy. While the industry is expecting a further 18% growth in passenger vehicle sales on the mainland in 2010, Denway's auto joint venture has set a production and sales target of 386,000 units for the year, up a mere 6% yoy, though this already overstretches its production capacity of 360,000 units. Denway's parent, Guangzhou Automobile Group, is arranging a listing of its H-shares on the local stock exchange via an introduction. Through a share swap, Denway will be privatized and delisted. As such, Denway's potential valuation will be subject to the valuation of the integrated group to be listed, which should increase scope for development.