Emerging Markets Radar (November 18, 2013)

Emerging Markets Radar (November 18, 2013)

  • Indonesia’s current account deficit narrowed to $8.4 billion in the third quarter or 3.8 percent of GDP, down from $9.9 billion in the second quarter. Foreign direct investment (FDI) was also relatively strong at $5.4 billion. The country needs continued improvement to lift up the basic balance. This way, Indonesia can arrive at a comfortable level for the currency to stabilize. Bank of Indonesia, the central bank, raised its benchmark rate by 25 basis points (bps) to help defend its currency.
  • The Bank of Korea, the central bank, left the policy rate unchanged as expected at 2.5 percent in November. The central bank cut the rate once this year in May by 25 bps. For the second month, Korea’s jobless rate stayed at 3 percent in October.
  • The Philippines’ manufacturing index went up 16.2 percent in September. However, this week the Haiyan typhoon was an enormous disaster for lives and property within the area.
  • Weaknesses

    • Renewed concerns about the Federal Reserve quantitative easing (QE) tapering happening sooner rather than later, induced a broad sell-off across emerging market funds and related assets. According to a recent HSBC research report, the stronger U.S. dollar, together with market expectations about a more hawkish outlook on emerging market monetary policy are driving equity investors’ fund flows toward developed markets. As a result, outflows from emerging market equity funds reaccelerated.

    Equity Fund Flows: Emerging Markets vs Developed Markets
    click to enlarge

    • The economy of the Czech Republic unexpectedly shrank 1.6 percent in the third quarter, reinforcing central bank concerns about deflation that prompted policy makers to start currency interventions. Central Europe’s economy is struggling to gain traction after a record-long recession, leading the central bank to begin Czech koruna sales to dissuade consumers from deferring purchases and to improve exporters’ competitiveness.
    • In October, China’s total social financing was Rmb 856.4 billion, down Rmb 574.8 billion in September due to decreases in interbank lending, trust loans and the issuance of wealth management products. New bank loans were Rmb 506.1 billion, down Rmb 280.9 billion month-over-month due to a loan-deposit ratio (LDR) limit and credit quota. China property starts slumped to -3.4 percent year-over-year in October from 41 percent in September. Growth in floor sales slowed to 12.1 percent from 22.8 percent in September, and real estate investment growth also slowed to 15 percent versus 22.3 percent in September.
    • Singapore’s September retail sales declined 5.9 percent year-over-year versus -7.7 percent in August, which is worse than consensus of -4.4 percent. In real terms, retail sales fell a smaller 3.4 percent.
    • Third quarter GDP in Hong Kong expanded 2.9 percent year-over-year and grew 0.5 percent from the prior quarter. This shows that the economy is slowly growing, although the reading is lower than the market consensus of 3.2 percent.
    • Industrial production in Malaysia was up 1 percent in September, lower than 2.7 percent in August and lower than the market consensus of 2.5 percent.


    Valuations in China are Subdued
    click to enlarge

    • As shown in the chart above, China stocks, represented here by the MCSI China index, are currently priced at historically low price to earnings (PE) multiples. Industrial companies have seen about 21 percent earnings growth as reported in the third quarter earnings release. Particularly after China’s third plenary meeting, policy details on reform will be a catalyst for companies that benefit from deregulations and urbanization.

    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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