Emerging Markets Radar (March 3, 2014)

March 3, 2014

3 minute read

Through Wednesday, February 26, both the Philippines and Indonesia have seen three consecutive weeks of net-equity fund inflows. Investors started to differentiate among emerging markets and turned more constructive toward those with improving economic fundamentals.
Confidence in emerging market (EM) equities continues to build, as tapering concerns appear overdone. Fundamentals in the Asian members of the “Fragile Five” have improved. The Brazilian real, Turkish lira and South African rand gained more than 3 percent in the past month. Export purchasing managers’ indexes (PMIs) in Taiwan and Korea are signaling strengthening domestic market (DM) demand.
MENA’s outperformance has been significant; 60 percent for MENA banks versus the MSCI Emerging Markets Financials Index over the last 12 months. The entry of the United Arab Emirates (UAE) and Qatar to the MSCI EM Index in May has been a significant driver, but the broader MENA region has also benefited, foreign exchange (FX) pegs, current account surpluses, a robust/downgrade-free gross domestic product (GDP), and high dividend yields.

Singapore’s industrial production growth in January expanded by a much lower-than-expected 3.9 percent year-over-year, a slowdown from December’s 6.4 percent pace, and driven by weakness in transport engineering and electronics.
The Ukraine hryvnia breached the psychological level of 10.0 per U.S. dollar, setting a new record low. Weakness in the Ukraine’s currency came as no surprise given the shaky economic situation and considerable headwinds on the external front. CNBC cited a National Bank of Ukraine (NBU) official as saying that the monetary authorities would abandon forex interventions.
Not only is the U.S. showing weak import demand, but so is the eurozone. The growth rate of the eurozone’s import volumes remained negative through November 2013, the twentieth-consecutive month of contraction.

Citi emerging market strategist set year-end target for Turkish equities at 15 percent above current levels. At only 8.3 times forward earnings, Turkish equities are already at the lower end of the ten-year range, a compelling entry point.
Yandex has announced a partnership with Google over online display advertising sales via the Real-Time-Bidding (RTB) system. The partnership is likely to result in improvements in ad quality and increased display adverting sales for both Yandex and the Russian ad market.
Further proliferation of mobile devices and the roll-out of the 4G wireless network in China may continue to change consumer behavior in everyday living, according to Goldman Sachs. Indeed, mobile payment, group purchases and advertising have the potential to double China’s online-to-offline market size in the next two years, according to iResearch. This megatrend should benefit leading Internet software and services companies.

While recent weakness in the Chinese renminbi was arguably engineered by the Chinese central bank to discourage cross-border carry trade arbitragers and manage hot money flows, the worsening prospect of the Chinese currency might weigh on sentiment toward the banking and property sectors in the near term.
Russia’s involvement in the Crimea dispute may have major consequences for Russian gas exports into the Ukraine and the European Union, and the entire Russian economy, already near stagnation. A recession would result in further pressure on the ruble and the macro-sensitive domestic names among financials and consumers, as well as Gazprom.
The risk themes for the year have not changed much. China, growth and flows remain the most important concerns. The recent slowdown in some Chinese numbers, the tightening in local credit conditions and the recent move in the currency, all underscore an economy that is in the process of adjustment.