Emerg­ing Mar­kets Radar (Jan­u­ary 30, 2012)

Strengths

• Despite world­wide eco­nomic tur­moil, global for­eign direct invest­ment (FDI) flows jumped by 17 per­cent in 2011. This num­ber, how­ever, widely reflects the large num­ber of cross-border merg­ers and acqui­si­tions. China was the second-largest FDI des­ti­na­tion, receiv­ing a record $124 bil­lion. India’s FDI rebounded 38 per­cent after a big fall in 2010, but remained far behind China.
• Poland’s econ­omy expanded at the quick­est pace in three years dur­ing 2011, as com­pa­nies boosted invest­ment and a weak­en­ing Pol­ish zloty buoyed exports. The country’s GDP rose 4.3 per­cent from the pre­vi­ous year, com­pared with a revised 3.9 per­cent in 2010.
• With a more favor­able pol­icy envi­ron­ment and an end in sight for the indus­trial destock­ing process, we antic­i­pate more sta­ble eco­nomic growth in China for Feb­ru­ary after the Chi­nese New Year cel­e­bra­tions are com­plete. CEBM con­cluded in a recent research report that his­tor­i­cal expe­ri­ence shows the destock­ing cycle usu­ally lasts four months and the firm thinks the end of the destock­ing process is likely to emerge around March.
• Chi­nese banks listed in Hong Kong are cur­rently cheaper than dur­ing the 2008 lows. Banks are cur­rently pric­ing at 5.4x 2012 price-to-earnings (P/E), 1.1x price-to-book value, and 21.63 per­cent return on equity, accord­ing to JP Morgan’s recent research.
• In China, 22 out of 31 provinces have seen their total GDP sur­pass Rmb 1 tril­lion. The Guang­dong province leads all of them with Rmb 5.3 tril­lion. The Shan­dong province hasn’t reported its 2011 GDP yet, but it is prob­a­bly the third largest provin­cial econ­omy in China after Jiangsu province with Rmb 4.8 tril­lion. Shanghai’s GDP is Rmb 1.9 trillion.
• In 2011, nearly 20 per­cent of the houses in Hong Kong were bought by peo­ple from main­land China.
• In 2011, China became the second-largest global mar­ket for Mercedes-Benz and BMW behind the U.S. CEBM reports Mercedes-Benz posted year-over-year sales growth of 32.8 per­cent dur­ing the first three quar­ters of 2011. This is roughly 25 per­cent of China’s lux­ury car mar­ket. CAAM expects sales of lux­ury cars to out­per­form the over­all sedan mar­ket in 2012.

Weak­nesses

• Bloomberg News reports that the world’s best-performing con­sumer stocks have become the lowest-rated by ana­lysts after val­u­a­tions of South African retail­ers and food pro­duc­ers climbed to the most expen­sive lev­els on record. Five com­pa­nies in the MSCI South Africa Con­sumer Sta­ples Index, includ­ing Shoprite Hold­ings and Mass­mart Hold­ings, are rated the low­est among peers in 36 countries.
• Weekly hous­ing sales trans­ac­tions in Bei­jing declined 70 per­cent from the pre­vi­ous week and 83 per­cent from the pre­vi­ous year. Although the Chi­nese New Year was a fac­tor, the trend will con­tinue until the price has dropped to a level that sat­is­fies the gov­ern­ment. In China, hous­ing mar­ket spec­u­la­tors have been squeezed out of the mar­ket in the last two years by tight­en­ing pol­icy. Now poten­tial buy­ers are wait­ing for a fur­ther price drop to get into the mar­ket. What the gov­ern­ment fears is that if the tight­en­ing pol­icy is lifted, the spec­u­la­tors will come back into the market.
• Korea reported forth quar­ter pre­lim­i­nary GDP growth at 3.4 per­cent on a yearly basis, lower than the esti­mate of 3.5 per­cent. On a quar­terly basis, it was up 0.4 per­cent, weaker than the con­sen­sus fore­cast of 0.5 percent.
• Japan’s Decem­ber CPI fell 0.2 per­cent on a yearly basis, and Japan’s core CPI fell 0.3 per­cent year-over-year for 2011. This shows the Japan­ese econ­omy is struc­turally weak.
• Korean man­u­fac­tur­ing con­fi­dence reg­is­tered at 81 for Feb­ru­ary, improv­ing from January’s 79 but still hov­er­ing near 30-month lows. Con­sumer con­fi­dence for Jan­u­ary came in at 98, drop­ping 1 point from December’s read­ing and reg­is­ter­ing a 10-month low.
• Thailand’s indus­trial pro­duc­tion shrank by 25.8 per­cent in Decem­ber, con­tract­ing for a fourth month on con­tin­u­ing effects from the flooding.
• Many migrant work­ers may not come back to the coastal cities after the Lunar New Year since they can just find a job inland locally in China, Zhong­guang Web reported in Bei­jing. A tight labor mar­ket will force employ­ers to raise wages and increase their costs.

Oppor­tu­ni­ties

• HSBC Emerg­ing Mar­kets reports that their key fore­casts see China avoid­ing a hard land­ing and grow­ing 8.6 per­cent, Brazil cut­ting inter­est rates to 9 per­cent by midyear, the Czech Repub­lic and Hun­gary being the only two emerg­ing mar­kets falling into reces­sion, Turkey’s infla­tion remain­ing high and mon­e­tary pol­icy unortho­dox, India’s infla­tion finally eas­ing, and Russia’s econ­omy grow­ing 3 per­cent. As emerg­ing mar­kets have started to show signs of an eco­nomic slow­down, pol­i­cy­mak­ers have switched back to a reflat­ing mode and we expect them to accel­er­ate their efforts if con­di­tions war­rant a more aggres­sive response.
• Colom­bia expects about $10 bil­lion in inter­na­tional invest­ment in crude, min­ing and energy projects this year, the Mines Min­ster Mauri­cio Car­de­nas said this week. Colom­bia is South America’s third-largest oil producer.
• Poland “deserves a rat­ing upgrade after all the work it has done since 1989” and because growth is bol­ster­ing investor con­fi­dence, said the CEO of Deutsche Bank’s local unit in Poland. Poland is rated A2 by Moody’s Investor Ser­vice, on par with Italy.

Threats

• Argentina has announced that it will extend the list of goods that require a gov­ern­ment per­mit to be imported and will raise import taxes for 100 prod­ucts to 35 per­cent from 20 per­cent, a lead­ing news­pa­per in the coun­try reports.
• On Jan­u­ary 31, Rus­sia will release the country’s fourth quar­ter GDP data. Ana­lysts at Roubini Global Eco­nom­ics are fore­cast­ing that the num­ber will show a mean­ing­ful decline from the third quarter’s 4.8 per­cent year-over-year increase.
• Two major sets of Chi­nese eco­nomic data that can con­tinue to decline in the first half of 2012 are GDP growth and prop­erty invest­ment. Before the econ­omy touches its low­est growth rate, the mar­ket may have to adapt to a large amount of bad news in the prop­erty mar­ket, such as sales dry-up and a sharp price fall.

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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