Emerging Markets Radar (March 11, 2013)

Emerging Markets Radar (March 11, 2013)

Strengths

  • China’s February export was up 22 percent, exceeding the market expectation of 8.1 percent. China export is highly correlated with industrial production (IP), and therefore, the market is looking for a better February IP number to be released this weekend.
  • China raised the fixed asset investment target to 18 percent growth for 2013 from 16 percent in 2012 in order to meet a GDP growth target of 7.5 percent. China also increased the fiscal budget deficit by 50 percent to Rmb1.2 trillion from last year’s 0.8 trillion.
  • National Development and Reform Commission (NDRC)  added 10 million kilowatts of solar power capacity to this year’s target. NDRC also said it will target expanding wind power capacity by 18 million kilowatts. The pollution reduction is clearly a policy priority in China.
  • The Chilean economy expanded 6.7 percent in January benefiting both from increased commodity exports to China and growing internal demand. Exports were up 7.4 percent from a year earlier, while retail sales rose 9.5 percent over the same period. It is expected Chile will grow at the second-largest pace this year among Latin American countries; analysts estimate GDP will climb 4.8 percent for the year.

Weaknesses

  • China’s February import was down 15.2 percent, lower than the market expectation of down 8.5 percent.
  • China lowered the target for broad money supply growth from last year’s 15.9 percent to this year’s 13 percent, which suggests a possible shift towards a more proactive fiscal policy and a more prudent monetary stance. Total social financing may continue to grow, which has the effect to increase debt durations.
  • The Indonesia rupiah is stabilizing below 10,000 rupiah per U.S. dollar.
  • Despite a two-day rally in the Brazilian Bovespa Index, macroeconomic news continues to be discouraging for Brazil. A surprisingly low inflation reading published on Wednesday, together with an agreement in which BTG Pactual Group will provide $1 billion in liquidity to billionaire Eike Batista’s EBX group, helped boost the Brazilian market mid week. The EBX group controls OGX Oil & Gas, MMX Mining & Minerals, and LLX Logistics, a total 5 percent weight in the Bovespa Index. On Friday however, three CPI numbers were announced significantly above analyst expectations, further reducing the country’s capacity to advance economic growth through monetary easing.

Opportunities

Emerging Markets - Chinese Property Bubble - www.usfunds.com

  • According to the graph above, China’s residential property value is 195 percent of GDP, which is in line with the U.S. and Japan, but below the U.K. and Ireland. After the Chinese government reinforced its housing tightening policies recently, the news media and China bears cooked up China ghost town stories again. In 2010, the most sensational story was Ordos city. A report in CBS’s 60 Minutes last weekend discovered another ghost city called Zhengzhou New Community within Zhengzhou, the capital city of Henan province. The story was actually made by a local Chinese TV crew last year before the building’s power and water connections were completed. CICC analysts had visited the community at the first report, and went back again last year after the community was completed and saw that people had started moving in. Zhengzhou has a population of nearly 9 million, and the Henan province is the most populated province in China, with more than 100 million people. Both Zhengzhou and Henan are growing much faster in recent years than coastal-developed China as this area is catching up in investment and consumption. In Henan, as everywhere in China, it is undeniable that people like properties for personal use and for investment savings, but most have made a large down payment, which is less risky if prices fall. Globally and historically, unleveraged housing investments for the long term have seen value increases.
  • Mexico’s President, Enrique Pena Nieto, will advance a plan to congress that recommends an end to the monopoly of state-owned Pemex in the domestic oil industry. Oil output has fallen dramatically over the last decade as the Mexican central government tapped into the company’s earnings to finance its budget and to add U.S. dollar reserves. The move is set to open the industry to more competition, restore oil production levels and reduce the tax burden on Pemex. President Pena Nieto expects a boost in foreign direct investment and economic growth.
  • A wide ranging energy deal is in the works that according to Financial Times, will see state-backed Turkish firms and Western oil majors plough money into Kurdish infrastructure and oilfields, connecting them to Turkey and the world beyond.  The deal would unlock the value of oil exploration companies operating in Northern Iraq. More broadly, the entire Turkish economy would benefit from greater energy independence, both through strong domestic demand and diversified export economy.

Emerging Markets - Adding-an-Arrow-to-a-Quiver - www.usfunds.com

Threats

  • China’s housing market tightening can hurt property stocks if local governments follow up with their own tightening measures. There are discontents in China from all walks of life towards the 20 percent capital gain tax, which eventually will cause property prices to go up when that levy is passed to the buyers.
  • Following the death of Venezuelan President Hugo Chavez, a multitude of reports on the current state of the Venezuelan oil industry have surfaced. Despite being home to the largest heavy oil reserves in the world, the country is facing a pipeline capacity glut; massive delays in infrastructure spending over the past few years will weigh down the country’s ability to capitalize on oil exports. Furthermore, Vice-President Nicolas Maduro is widely expected to win the election that should follow, leaving little hope for structural changes that could reduce the country’s massive fiscal deficit, excessive inflation and precipitous productive capacity drop in its oil sector.
  • An influential think tank warned that in the nearest future, president Putin will make replacements in the top echelons of Russia’s ruling class either by dismissing the government or by announcing early Duma elections. The measures would be a result of the perceived inability of the ruling elite to successfully respond to the challenges Russia is facing: growing popular dissatisfaction with corruption, the lack of growth opportunities for the country, and increased number of conflicts among various ruling clans.
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