Emerging Markets Radar (December 28, 2011)

Emerging Markets Radar (December 28, 2011)

Strengths

• China and Thailand have signed a Chinese yuan (Rmb)/Thai baht(THB) currency swap agreement worth $11 billion to facilitate non-U.S. dollar trade settlements between the two countries. China also provided a $400 million loan to Thailand to aide reconstruction in areas that were devastated by floods earlier this year. Thailand hopes to see its trading activity with China increase at an annual rate of 20 percent. Thailand is also looking to attract similar growth in the amount of Chinese tourists visiting the country.
• China’s Ministry of Railway disclosed a nearly $80 billion investment budget for 2012. This is less than the $111 billion amount budgeted for 2011, but is believed to be at a sustainable level. Investment activity slowed well below the forecasted amount following the deadly Wenzhou accident earlier this year. The Ministry was recently allowed to raise around $32 billion in order to help spark investment interest.
• China has approved 9 Hong Kong companies to use their Rmb funds raised within the city to invest in the domestic Chinese securities market under the new Renminbi Qualified Foreign Institutional Investor (Rmb QFII) rules. This flow of capital should help the Mainland Chinese market expand beyond its borders.
• Premier Wen Jiabao said in a statement posted on the central government’s website that the Chinese government will keep the country’s export policies, such as tax rebates, “basically stable” next year as the government will mainly use fiscal spending to support “structural tax cuts” and improve the lives of citizens.
• We believe Chinese monetary policy is a precursor to change in the market cycle so we’re monitoring any shift in monetary policy. Headline news coming from China over the past few months has indicated the government is focused on policies to maintain a stable level of growth. This means a mild fiscal and monetary stimulus mode. However, this can quickly change if the government feels conditions have worsened.
• Malaysia’s CPI for November was in-line with expectations at 3.3 percent on a year-over-year basis. This is slightly lower than the October figure and is similar to a general downtrend in CPI we’ve seen across Asia.
• Taiwan’s unemployment rate was 4.32 percent in November, slightly above the country’s 4.30 percent reading in October. In a separate development, Taiwan’s Financial Supervisory Commission said it will let Chinese banks buy stakes in local lenders and financial holding companies beginning January 2.
• The KOSPI, South Korea’s stock market index, sold off 3.43 percent on Monday after the passing of Kim Jong-Il was announced. However, the market recovered quickly when investors believed the situation is stable and will not affect the fundamentals of the South Korean economy.
• The state-run statistics agency said that Colombia’s industrial production rose 5 percent in October compared to production from a year earlier. This beat analysts’ estimates of a 4.3 percent increase. RGE believes that third quarter GDP in Colombia is likely to register the highest growth since early 2008, backed by strong domestic demand momentum.
• While corporate profits declined as percentage of GDP as a result of Putin’s drive to roll back Russian oligarchs’ grip on the Russian economy, wages have grown and spurred consumer demand for big ticket items.

Weaknesses

• Month-over-month new home prices dropped in 49 Chinese cities during November, more than half of the 70-largest cities monitored by the government. However, on a year-over-year basis, 61 cities have experienced 5 percent price increases. This weakness could be the reason the Chinese government is reluctant to lift the housing control measures. Sales prices for new homes in Beijing and Shanghai are up 1.3 percent and 2.4 percent, respectively.
• It’s currently tough times in the Philippines. The Typhoon Washi has killed 650 people and an additional 800 are missing. In addition, the country’s budget deficit increased by more than 3 percent in November to $504 million as government agencies boosted spending.
• Taiwan’s industrial production declined for the first time since 2009 during the month of November, contracting 3.55 percent.
• Slumping output for pharmaceuticals and electronics led Singapore’s industrial production to decline nearly 10 percent in November. Singapore’s CPI rose 5.7 percent on a year-over-year basis, slightly above October’s CPI at 5.4 percent.
• Brazil posted a record $6.8 billion current account deficit in November as slower global growth narrowed the trade surplus. In October, the account deficit came in at $3.1 billion.
• S&P cut Hungary's credit rating to junk on Wednesday this week, in anticipation of the outcome as preliminary talks on Hungary's new financial assistance program were said to have been breaking down. With market pressures and 4.7 billion euros in external debt coming due in 2012, the country depends on an IMF safety net to avert a full-blown balance of payments crisis during the eurozone crisis.

Opportunities

• Indonesians’ Growing Wealth Increased Mutual Fund Assets
• Rising wealth in Indonesia has fueled a dramatic increase in assets for the country’s domestic mutual funds over the last six years. The inflows into domestic funds from this wealth effect will increase the liquidity of the Jakarta stock market and likely be good for stock prices.

• Peru's chief banking regulator is working with lenders to bring down annual interest rates on loans that run as high as 120 percent by promoting competition and best practices, saying that the cap is the “last resort.” Bloomberg reported the Superintendent of Banks, Insurance and Private Pension Funds had said that the regulation aims to help banks assess the risk of lending to clients, enabling them to charge less for loans.
• For the first time in a decade, South Africa has turned to Russia for wheat imports, as the price of the grain from the world's third largest wheat exporter undercuts Argentina, which has been the biggest source of South African imports for four of the last seven years. Additionally, South Africa has also turned to other former Soviet countries such as Lithuania for its supplies as well, searching for best prices.
• LATAM, Latin America's biggest airline, was approved, merging two major Latin American airlines together, valued at $14.5 billion and representing 6 percent of global air transport.

Threats

• China and nearly all emerging economies are experiencing a downtrend in the pace of growth. We agree with the majority of economists that believe growth will continue to slow into 2012 before touching bottom sometime in the second quarter. In the meantime, the market will likely oscillate on the developments of the eurozone crisis and Chinese policy adjustments without any regard to company fundamentals.
• The Hungarian central bank raised policy rates by 50 basis points to 7 percent this week, in an attempt to strengthen the currency after the breakdown of IMF loan talks. The pro-cyclical policy of the central bank amid global slowdown is likely to have a negative impact on growth.