Emerging Markets Radar (June 3, 2013)

Emerging Markets Radar (June 3, 2013)

Strengths

• China’s industrial profits rose 11.4 percent year-over-year in the period of January through April; profits rose 9.3 percent to RMB 437 billion in April. With double-digit profits increasing, the current H-shares valuation is attractive.
• During an environmental study meeting of the Politburo Standing Committee of the Communist Party of China, president Xi Jinping said that China cannot sustain economic growth without protection of environment. It is clear that environmental protection is moving to the forefront of policy decisions.
• Wenzhou, Zhejiang province dropped 0.09 percent on non-performing loans for April-end; this is from a month earlier to 3.92 percent. Outstanding bad loans fell 685m yuan from the end of March, Shanghai Securities News reported, citing the city’s banking regulator.
• China has allowed the U.S. Public Company Accounting Oversight Board access to documents from Chinese accounting forms related to U.S.-listed Chinese companies.
• Hong Kong’s April retail sales rose 20.7 percent year-over-year by value, versus the market estimate of 14.5 percent.
• The Philippines’ GDP growth came in at 7.8 percent year-over-year for the first quarter of 2013, sailing past consensus estimates of 6.2 percent. Construction activity was up 33 percent year-over-year, slightly faster than the fourth quarter of 2012’s 30-percent pace. Private construction grew 31 percent, riding the property pre-selling boom of recent years. Public construction spending surged 46 percent, consistent with the government’s infrastructure thrust. Note that the growth has come without the big-ticket, public-private partnership (PPP) projects. The government expects to increase infrastructure spending from just 2.5 percent of GDP currently, to as much as 5 percent by 2016 (including PPP), implying a sustained 30-40 percent compound annual growth rate (CAGR).
• The Bank of Thailand, the central bank, cut benchmark interest rates by 25 basis points to 2.5 percent.
• Indonesian infrastructure construction spending grew 23 percent CAGR during the 2007-2012 periods. The government plans 17 percent growth in infrastructure spending for 2013, to 2.2 percent of GDP. This trend will continue to make up the lost decade in infrastructure investment between the 1998 Asian financial crisis, and the completion of banking sector restructuring in 2004-2005.
• Taiwan unveiled 13 measures in a new economic stimulus plan, which includes cash-for-clunkers, capital gains tax revisions, incentives for private investments, and government funds for start-ups.
• Following the weak first-quarter economic data published last week, the Chilean economy appears to have regained its footing in April. Retail sales for the month soared by 11.2 percent from a year earlier, while the manufacturing index grew by 3.4 percent for the month beating analysts’ forecasts of a 2.9 percent rise. The rising domestic demand statistics are comforting for a country with large exposure to commodity exports amid weak global commodity prices.

Weaknesses

• Chinese premier Li Keqiang said China will grow its GDP at 7 percent, doubling GDP per-capita by year 2020 from the 2010 level. This is lower than the 7.5 percent GDP growth target set at the beginning of the year.
• The People’s Bank of China (PBOC), the nation’s central bank, will not rashly cut interest rates on concerns of inflation, Shanghai Securities News reported. It cited Wang Guogang, head of the Institute of Finance and Banking at the Chinese Academy of Social Sciences, as a think-tank for the Chinese government.
• The Bank of Thailand’s (BOT) private consumption index was up 1.7 percent year-over-year, but was down 0.5 percent month-over-month. The private investment index was down 1.1 percent year-over-year, and down 1.6 percent month-over-month in April, tracking the lackluster manufacturing index that was down 3.8 percent year-over-year and down 5.1 percent month-over-month. April exports were revised down to 2.9 percent versus consensus of 5.3 percent and 4.55 percent in March.
• Brazil’s GDP grew 1.9 percent year-over-year in the first quarter of 2013, trailing analysts’ forecasts of a 2.3 percent growth. More significantly, the number is far from President Rousseff’s growth estimates at the beginning of the year, which called for 3 percent growth for 2013. The rate disappointed despite strong domestic consumption and investment, as the trade balance deteriorated with falling exports and rising imports. Earlier this month, April exports data showed that despite fears of falling demand from China, exports to the Far East nation grew by 5.9 percent, while the falling demand came from lower oil shipments to the U.S.

Opportunities

click to enlarge

• As shown in the graph above, the Philippines has all stars aligned in favor of their economy, including growing overseas workers’ remittance, booming business process outsourcing, increased consumer spending, and demand for infrastructure investments. Investors have done very well investing in the Philippines’ stock market due to growing corporate sales and earnings.
• Vice President Joe Biden’s six-day tour of Trinidad and Tobago, Colombia, and Brazil is certainly a welcome development for a region that has seen little political interest from Obama’s administration as it focuses on its Transatlantic and Trans-Pacific trade partnerships. The visit already resulted in new trade agreements amounting to $500 billion between the U.S. and Brazil, with a focus on energy exploration and biofuels that should mitigate the negative impacts on Brazil’s trade of diminished oil exports to the U.S.

Threats

• Thailand has seen weak economic numbers recently from private consumption to exports. All of the policy catalysts after Prime Minister Yingluck was elected have already materialized. The market is looking for new drivers in the short term, though the economy still is solid, particularly in tourist and urbanization areas. The market corrected 2 percent in May.
• Mexico posted a large $1.23 billion trade deficit for the month of April against analysts’ forecasts of a small $190 million surplus. The deficit came as the pace of imports beat the slower increase in exports, led by a slip in petroleum exports. The news is unsettling for two reasons; first, the same type of deterioration in the trade balance weighed heavily on Brazil’s first-quarter GDP growth disappointment, and secondly, Mexico’s GDP growth for the first quarter was already weak, coming in far below previous readings.