Emerg­ing Mar­kets Cheat Sheet (Octo­ber 3, 2011)

Strengths

• In China, indus­trial com­pa­nies’ profit rose 28.2 per­cent in the first eight months from a year ago. Net income climbed to 3.2 tril­lion yuan ($500 bil­lion), the National Bureau of Sta­tis­tics of China said this week.
• Korea has suf­fi­cient foreign-exchange reserves to cope with a poten­tial finan­cial cri­sis even if Euro­pean investors take their money out of the coun­try, cen­tral bank Gov­er­nor Kim Choong Soo said.
• Indone­sia has for­eign reserves of $120 bil­lion, while for­eign debt fund­ing is about $30 bil­lion, accord­ing to CLSA research. The reserves should pro­vide Indone­sia enough liq­uid­ity in the event that for­eign­ers with­draw their money as a result of an esca­la­tion of the Euro­pean sov­er­eign debt crisis.
• China’s hog herds are “firmly bounc­ing back,” with the total num­ber of pigs ris­ing for six months and the num­ber of breed­ing sows ris­ing for four months, accord­ing to the Min­istry of Agri­cul­ture in Bei­jing. The pork price increase was the largest con­trib­u­tor to ris­ing infla­tion in China. Also this week, China Pre­mier Wen Jiabao said China food prices are stabilizing.
• Korea’s indus­trial pro­duc­tion rose 4.8 per­cent in August from a year ago after ris­ing 4 per­cent the pre­vi­ous month, but it declined 1.9 per­cent sequen­tially month-over-month.
• Exports in India have been steadily grow­ing and are on course to reach the government’s tar­get of $300 bil­lion for the cur­rent fis­cal year, dri­ven by increased gov­ern­ment sup­port to exporters to tap into new mar­kets in Latin Amer­ica and Africa.
• Turkey is three times more effi­cient in using energy than China, Rus­sia, or South Africa, accord­ing to Credit Suisse. Also, Cen­tral Euro­pean coun­tries (the Czech Repub­lic, Hun­gary and Poland) made the most incre­men­tal improve­ment over the last decade.

• Turk­stat reported that the Turk­ish econ­omy added 2.2 mil­lion new jobs in the first eight months of this year.

Weak­nesses

• Korea’s con­sumer con­fi­dence index fell to a five-month low of 99 in August, down from July’s read­ing of 102.
• Investors are wor­ried about China’s shadow-banking loans, due to inten­si­fied news that many small– and medium-sized enter­prise (SME) debtors are bank­rupt, and there­fore bank shares are under pres­sure. A China Inter­na­tional Cap­i­tal Cor­po­ra­tion Lim­ited (CICC) bank ana­lyst esti­mated pri­vate lend­ing went up 38 per­cent to RMB 3.8 tril­lion in total loans out­stand­ing in the first half this year, and he fur­ther esti­mates that non-public loan (NPL) increases from small enter­prises would reach RMB150 bil­lion, 0.46 per­cent of cor­po­rate loans, not as bad as many media reported.
• Eco­nomic growth in South Africa slowed sig­nif­i­cantly in the sec­ond quar­ter of 2011, to 1.3 per­cent from 4.5 per­cent in the first quar­ter. This can be largely attrib­uted to the ongo­ing sov­er­eign debt cri­sis in Europe and an over­all neg­a­tive global eco­nomic out­look. Cur­rently, unem­ploy­ment is just above 25 per­cent of the labor force.

Oppor­tu­ni­ties

• Mer­rill Lynch expects record 2010 con­struc­tion per­mits in Turkey to trans­late into a sig­nif­i­cant increase in demand for kitchen appli­ances. Typ­i­cally, con­struc­tion per­mits lead house deliv­er­ies and white goods sales by 12 to 18 months.

• As rail­way invest­ments decline, China’s next bright spot in fixed asset invest­ment is water con­ser­vancy invest­ment. The Chi­nese gov­ern­ment is said to invest Rmb 4 tril­lion in the next five years in water and envi­ron­ment infra­struc­tures. This chart shows the water con­ser­vancy invest­ment has increased in recent years after being neglected for the last 10 years, after fre­quent droughts, floods and food short­ages in recent years. In the twelfth five-year plan, water infra­struc­ture invest­ment is expected to be at a cumu­la­tive aver­age growth rate (CAGR) of 23 per­cent, accord­ing to CLSA China strate­gist Andy Rothman.



• Accord­ing to The Bei­jing Axis, the global bal­ance of power is shift­ing into the hands of rapidly indus­tri­al­iz­ing emerg­ing growth giants, espe­cially Brazil, Rus­sia, India, China and South Africa. Today, these coun­tries are fuelling the global recov­ery with their huge demand require­ments, high growth mul­ti­ples and vast deploy­ment of cap­i­tal. The report also high­lighted that these emerg­ing pow­ers are becom­ing more present in secur­ing a foothold in Africa’s vast and rich resources.
• Bloomberg reported that Bovespa, the oper­a­tor of Latin America’s largest secu­ri­ties exchange, is plan­ning to start a bond trad­ing plat­form by the mid­dle of next year. Marcelo Maziero, Bovespa’s head of prod­uct and cus­tomer devel­op­ment said, “We are devel­op­ing a plat­form. We are accel­er­at­ing the fixed-income side, so it gets to the same level as stocks.”

Threats

• In China, SMEs are very much under­dogs when it comes to bank lend­ing; there­fore, they bor­row from shadow banks, i.e., pri­vate loans and entrusted loans, to expand their growth. With the econ­omy slow­ing down and loan price going up (see chart shown below), many of them are lever­aged at a wrong time. Many SMEs are now finan­cially stressed.

• The La Niña storm is threat­en­ing record South Amer­i­can crops. Rabobank Inter­na­tional reported that La Niña runs the risk of bring­ing dry weather to parts of South Amer­ica, threat­en­ing record crop pro­duc­tion on the con­ti­nent. Ana­lysts have spec­u­lated that because weather fore­casts indi­cate that La Niña con­di­tions are expected to strengthen, this would likely have a neg­a­tive impact on corn planted area and yields. Corn pro­duc­tion is expected to rise 12 per­cent this year and soy­bean out­put may gain 1 percent.
• Colombia’s pol­i­cy­mak­ers will prob­a­bly leave bor­row­ing costs unchanged for a sec­ond straight month and end a dollar-purchase pro­gram as slow­ing infla­tion allows them to gauge the impact of the Euro­pean debt cri­sis on global growth, Bloomberg reported. Cur­rency “inter­ven­tion isn’t needed at these lev­els,” head ana­lyst at Banco de Bogota SA Camilo Perez said, “What is the gen­eral dri­ver in mar­kets now is risk aver­sion and that means a weaker peso.” We con­tinue to see emerg­ing mar­kets leav­ing their rates unchanged in response to global eco­nomic uncertainty.

Frank Holmes is CEO and chief investment officer of U.S. Global Investors, Inc., and a Toronto, Canada native, which manages a diversified family of mutual funds and hedge funds specializing in natural resources, emerging markets and infrastructure. The company’s funds have earned more than two dozen Lipper Fund Awards and certificates since 2000. The Global Resources Fund (PSPFX) was Lipper’s top-performing global natural resources fund in 2010. In 2009, the World Precious Minerals Fund (UNWPX) was Lipper’s top-performing gold fund, the second time in four years for that achievement. In addition, both funds received 2007 and 2008 Lipper Fund Awards as the best overall funds in their respective categories. Mr. Holmes was 2006 mining fund manager of the year for Mining Journal, a leading publication for the global resources industry, and he is co-author of “The Goldwatcher: Demystifying Gold Investing.” He is also an advisor to the International Crisis Group, which works to resolve global conflict, and the William J. Clinton Foundation on sustainable development in nations with resource-based economies. Mr. Holmes is a much-sought-after conference speaker and a regular commentator on financial television. He has been profiled by Fortune, Barron’s, The Financial Times and other publications. Read more from the author/contributor here.

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