Kuala Lumpur, Malaysia

Emerg­ing Mar­kets Cheat Sheet (Octo­ber 24, 2011)

Strengths

• China’s indus­trial pro­duc­tion increased 13.8 per­cent in Sep­tem­ber, while the mar­ket esti­mate was 13.4 per­cent, and August was 13.5 per­cent. Fixed Asset Invest­ment exclud­ing rural house­holds climbed 24.9 per­cent, bet­ter than mar­ket con­sen­sus of 24.8 per­cent in the first nine months of the year, but slower than 25 per­cent up for the first eight months at the end of August. Prop­erty invest­ment for Jan­u­ary to Sep­tem­ber rose 32 per­cent, from 33.2 per­cent through August, still show­ing some strength. Retail sales expanded 17.7 per­cent, bet­ter than the esti­mate of 17 per­cent. Chi­nese con­sumer spend­ing is the pol­icy focus for growth to adjust China’s GDP weight­ing more toward consumption.
• China has allowed four provinces and cities to issue local gov­ern­ment bonds for the first time. This might be the cen­tral government’s first step toward swap­ping local gov­ern­ment bank loans for local gov­ern­ment bonds. This would avoid any default of bank loans by the local governments.
• The Bank of Thai­land kept its bench­mark one-day bond repur­chase rate at 3.5 per­cent. All Asian cen­tral banks stopped fur­ther mon­e­tary tight­en­ing in September.
• Growth in consumer-facing sec­tors in Rus­sia remains robust. Retail sales expanded by 9.2 per­cent year-over-year in Sep­tem­ber, and grew by 7.5 per­cent for the third quar­ter as a whole.
• Rus­sia, Argentina and Colom­bia were the three best-performing emerg­ing mar­kets coun­tries for the week in U.S. dol­lar terms.
• Sco­tia­bank empha­sized how “oppor­tune” it is to invest in Asia and Latin Amer­ica. Canada’s third-biggest bank agreed this week to buy a 51 per­cent stake in Banco Col­pa­tria Red Multi­banca Col­pa­tria SA of Colom­bia for approx­i­mately $1 bil­lion dol­lars. This is Scotiabank’s largest inter­na­tional takeover, accord­ing to Bloomberg. The bank’s strat­egy is to expand where clients such as prop­erty devel­op­ers and min­ing com­pa­nies are doing business.
• Retail sales grew in August for South Africa, accel­er­at­ing to 7.1 per­cent, more than the revised 3 per­cent growth in July.

Weak­nesses

• The chair of China’s Bank Reg­u­la­tory Com­mis­sion said the risk of mort­gage loan defaults is man­age­able for the banks even if hous­ing prices drop 40 per­cent. The mar­ket inter­preted his state­ment as an indi­ca­tion that China won’t lift hous­ing mar­ket con­trols with falling prop­erty prices. In addi­tion, China’s hous­ing min­istry may ask local gov­ern­ments to con­sult the author­i­ties before adjust­ing real-estate curbs, the China Busi­ness Jour­nal reported.
• China for­eign direct invest­ment gained 7.9 per­cent to $9 bil­lion, the slow­est pace in three months, as com­pa­nies pared spend­ing amid global eco­nomic concerns.
• Russ­ian indus­trial pro­duc­tion growth in Sep­tem­ber was lower than in August and only 3.9 per­cent up from a year ear­lier, the slow­est pace since it began expand­ing in Octo­ber 2009, as increas­ing risks to the global econ­omy weighed on inven­tory accumulation.
• Asian mar­kets expe­ri­enced weak­ness with Tai­wan and India being among the bot­tom three coun­try per­form­ers. Turkey led the lag­gards, down 4.23 per­cent for the week. Cen­tral Bank of Turkey (CBT) loos­ened liq­uid­ity in 2009 – 2010 to sup­port the econ­omy, and tight­ened it in first half of this year to slow growth. CBT again has been pro­vid­ing liq­uid­ity since July of this year, but this week raised overnight inter­est. This chart from Uni­credit shows that the liq­uid­ity CBT gives with one week repos and draws with reserves is square at the moment.

• Mon­e­tary pol­icy changes in Brazil saw inter­est rate cuts despite infla­tion ris­ing to 7.3 per­cent in Sep­tem­ber. Brazil’s bank cut rates to 11.5 per­cent from 12 per­cent, after increas­ing them five times this year to com­bat ris­ing prices. The eco­nomic growth fore­cast for 2011 has been reduced to 3.5 per­cent as well.
• This week, South Africa’s Com­pe­ti­tion Appeal Court began hear­ing a gov­ern­ment filed law­suit to com­pel reg­u­la­tors to review a deci­sion allow­ing Wal-Mart Stores Inc. to buy con­trol of Mass­mart Hold­ings Inc. Lawyers for the union are claim­ing that reg­u­la­tors failed to take account of neg­a­tive effects on the econ­omy or jobs. In June, Wal-Mart, the world’s largest retailer, paid $2 bil­lion for a 51 per­cent stake in Mass­mart Hold­ings Ltd., South Africa’s largest food and general-goods wholesaler.

Oppor­tu­ni­ties

• Chi­nese gov­ern­ment sav­ings are increas­ing to above 8 per­cent of GDP, as shown in the first chart shows. The sec­ond chart shows that the Chi­nese cen­tral gov­ern­ment holds RMB 3.9 tril­lion of deposits with the cen­tral bank, or 8 per­cent of GDP. All of this pro­vides the author­i­ties a mas­sive liq­uid­ity buffer to deal with an emer­gency situation.

• The Russ­ian econ­omy may have expanded 4.5 to 5 per­cent in the third quar­ter. Hav­ing stag­nated dur­ing the early part of the year, invest­ment has picked up recently and grew to a nine-month high of 8.5 per­cent in Sep­tem­ber. Allow­ing for a recov­ery in agri­cul­tural out­put fol­low­ing last year’s droughts, econ­o­mists are rais­ing their fore­casts for GDP growth dur­ing the quarter.
• HSBC flash Pur­chas­ing Man­agers Index (PMI) num­bers for China will be com­ing out Mon­day. This will give a pre­view of China’s strength or weak­ness of the country’s man­u­fac­tur­ing activity.
• French Pres­i­dent Nico­las Sarkozy and Ger­man Chan­cel­lor Angela Merkel will be meet­ing this week­end for the E.U. and euro­zone Twin Sum­mits meet­ing. The Elysée Palace web­site high­lighted a Franco-German state­ment depict­ing the three main focuses of the meet­ing: the imple­men­ta­tion of the eurozone’s bailout fund, a recap­i­tal­iza­tion plan for Euro­pean banks, and the imple­men­ta­tion of euro­zone eco­nomic gov­er­nance and strength­en­ing Euro­pean inte­gra­tion. The con­clu­sions reached at this meet­ing will cre­ate mate­r­ial effects worldwide.
• In the Inter­na­tional Mon­e­tary Fund’s lat­est regional report, Sub-Saharan Africa is expected to show 5 per­cent growth for the year, and an even more promis­ing 6 per­cent for 2011.

Threats

• Asian investors became over­whelmed and con­fused by mixed sig­nals from euro­zone offi­cials who are involved in resolv­ing the Greek debt sit­u­a­tion. Investors are also con­cerned with increas­ing risks that the U.S. may not recover mean­ing­fully for a long time, which can impact exports from Asian coun­tries such as China and Korea. In the last cou­ple of months, Chi­nese stocks have been bom­barded with spec­u­la­tions and reports on a pri­vate lend­ing bub­ble, shadow bank­ing involv­ing Chi­nese banks, local gov­ern­ment loan risks, and a slow­ing econ­omy. Although many sec­tors of Hang Seng Com­pos­ite Index have reached val­u­a­tions at or below the lows of 2008, there is a risk that investors tend to over-shoot in short term.
• The recent sell off in Emerg­ing Europe’s cur­ren­cies might lead to a pick-up in infla­tion and put pres­sure on pol­i­cy­mak­ers to raise inter­est rates.
• Con­cern in Argentina is increas­ing as the risk of non-payment rises based on the fact that Pres­i­dent Cristina Fer­nan­dez will con­tinue to draw on a declin­ing amount of cen­tral bank reserves to pay debt instead of adopt­ing poli­cies that would give her access to global credit mar­kets. Cen­tral bank reserves fell 8.7 per­cent to $48 bil­lion from $52.6 bil­lion in Jan­u­ary as cap­i­tal flight forced the cen­tral bank to sell to curb the peso’s decline. Traders are now fore­cast­ing a 44 per­cent debt default should Fer­nan­dez be re-elected, who is a favorite to win elections.

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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