Emerging Markets Radar (November 11, 2013)

Emerging Markets Radar (November 11, 2013)




  • Stock markets in China, Hong Kong, Korea, Taiwan, and Association of Southeast Asian Nations (ASEAN) countries fell for five consecutive days this week as investors took profits after the summer’s market rallies. This decline was in spite of improving industrial activities globally and recovery in Europe and the U.S.
  • The four biggest Chinese banks lent Rmb182 billion in October, the lowest monthly new loans in the year. The declining new loans are primarily due to decreases in interbank transactions in an effort to deleverage the financial system exposure in non-standardized wealth management products.
  • Malaysia left its policy rate unchanged at 3 percent, fearing creeping inflation driven by domestic cost factors.
  • Taiwan headline inflation moderated to 0.64 percent in October from 0.84 percent in September, surprising the market on the downside.
  • To ease pollution and traffic jams, Beijing will reduce the number of new passenger vehicles allowed on the road by 38 percent next year.
  • Indonesia GDP growth moderated to 5.6 percent in the third quarter from 5.8 percent in the second quarter this year after the trade deficit and currency depreciation affected domestic consumption and investments.
  • Opportunities

    China's Private Companies May Benefit Most from Economic Reform
    click to enlarge

    • A BCA Research commentary shows investor sentiment towards the eurozone continues to improve, which has helped a recovery in equity prices. In BCA’s opinion, much of the optimism is warranted, as the eurozone continues to benefit from Mario Draghi’s “whatever it takes” pledge, improved export competitiveness in the periphery, and growing pent-up demand for capital expenditures and consumer durable purchases. Despite the progress, European stocks still appear to be discounting a more pessimistic outlook than is warranted. The chart above shows that European stocks currently trade at a Shiller P/E of 13x, compared with 24x in the U.S. Although U.S. stocks have historically traded at a premium to their European counterparts, the current valuation gap is close to a historic high.
    • Over the last couple of days, there have been increasing reports on plans to expedite the re-privatization of Greek banks from the Hellenic Financial Stability Fund (HFSF). The idea would be to have the HFSF make a public offer for the outstanding warrants in exchange for the common shares of the banks currently held by the HFSF. Warrant holders, largely hedge funds and other private financial institutions, could see a lift in the value of their holdings as it is expected the HFSF will provide a sweetener for investors to convert into common shares ahead of expiration. Similarly, the HFSF would benefit from disinvesting assets acquired during the peak of the crisis.

    Government-Policy-Help-Grow-Chinas-Service-Sector-in-Line-with-Peers
    click to enlarge

    • As shown in the chart above, there is plenty of room for China’s service sector to catch up with the percentage of the service sector of national GDP in developing countries. China October non-manufacturing PMI was reaching a yearly high at 56.3, showing robust expansion. The Chinese government policies now are making it possible for private capital to enter service sectors such as banking, social services, and insurance. Among service sectors, tourism and e-commerce are the fastest growing sectors in China, which are dominated by private entrepreneurs.

    Threats

    About the author

    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.

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