he Chinese H-share market, as proxied by the Hang Seng China Enterprises Index (HSCEI), commenced 2010 at 12,794.13 points and rallied above 13,000 points in 1Q2010. However, the HSCEI retreated sharply in 2Q2010 following the Chinese government's tightening measures to curb bank lending and to cool the property sector. The retracement in global stock markets amid concerns over the European sovereign debt crisis also contributed to the decline in the Greater China markets.

As a result of the Chinese government's accommodative monetary policy and the US$586 billion fiscal stimulus package announced in November 2008, China's loans growth surged to 32 percent in 2009. To ease bank lending, the People's Bank of China issued a directive to the banking sector to reduce loans growth to 19 percent by end 2010.

Rising income, easier monetary policy and a rebound in domestic economic activities led to a surge in property prices in China. Following gains of up to 50 percent in 2009, property prices in selected cities continued to increase by more than 40 percent in 1Q2010. To curb escalating property prices, the Chinese government raised mortgage downpayments, increased mortgage rates and removed bank loan facilities for third home purchases in selected cities in April 2010.

In 1H2010, the HSCEI registered a decline of 10.4 percent to close at 11,466.24 points. Over the same period, the Hong Kong and Taiwan markets registered declines of between 8 percent and 11 percent while the mainland Chinese stock markets fell by a larger margin of 27 percent.

On the currency front, the Ringgit appreciated by about 6 percent against the Hong Kong Dollar (HKD) and Taiwan Dollar (TWD) in 1H2010. As the stock markets in mainland China are restricted markets, Public Mutual's China funds are mainly invested in China 'H' Shares and Taiwan stocks which are denominated in HKD and TWD. The strengthening of the Ringgit against these currencies would reduce the returns of the respective funds as the Net Asset Value (NAV) of these funds is stated in Ringgit terms.

Going forward, China stocks are underpinned by resilient economic growth and undemanding stock valuations. In addition, tightening measures taken to cool China's property market may come to an end as asset inflationary pressures start to moderate. The recent move by the People's Bank of China to increase the flexibility of the Renminbi exchange rate is expected to boost domestic consumption, reduce the nation's dependence on exports and lead to more sustained economic growth over the longer term.

The Australian market, as proxied by the S&P/ASX 200 Index, started the year at 4,870.60 points and rose by 2.7 percent to 5,001.9 points in mid-April 2010 amidst rising commodity prices and signs of further improvement in global economic activities. However, retracement in commodity prices and the Australian government's announcement of the Resource Super Profits Tax (RSPT) on May 2, 2010 caused the Australian stock market to register a year-to-date decline of 11.7 percent to close at 4,301.5 points on June 30, 2010.

The proposed tax, to be imposed on mining companies operating in Australia by July 2012, is expected to reduce net earnings of Australian mining companies by about 5 percent to 10 percent. Following this announcement, stocks of major Australian mining companies have fallen by about 8 percent to 10 percent. As such, the impact of this tax appears to have been priced in by the market. Over the longer term, the prospects for Australian mining companies are expected to remain resilient supported by robust demand for commodities from emerging Asian economies.

Looking ahead, the Australian equity market is well positioned to benefit from the nation's resilient long-term economic growth rate of about 3 percent, vast commodity resources, fundamentally strong banking system and healthy fiscal position.

On a year-to-date basis to June 30, 2010, the Ringgit has appreciated by about 11 percent against the Australian dollar. The strengthening of the Ringgit against the Australian dollar have reduced the returns for funds that invest in the Australian market as the Net Asset Value (NAV) of these funds are stated in Ringgit terms. Sustained demand from China and selected Asian countries is expected to underpin Australia's commodity exports and the Australian Dollar over the longer term.