Emerging Markets Radar (April 7, 2014)

Emerging Markets Radar (April 7, 2014)

Strengths

  • After reporting cumulative outflows of $51.2 billion, or -6.6 percent of assets under management over the last 22 consecutive record outflow weeks, dedicated emerging market funds reported inflows of $2.49 billion this week. This is the first inflow week since October 23, 2013.
  • Turkish GDP growth in the final quarter of the year stood at 4.4 percent, as both private investment and consumption growth accelerated, while public sector contribution also supported overall growth performance. In addition, the trade balance in February stood at $5.1 billion, the lowest since 2010, as exports rose 6.2 percent and imports declined 5.9 percent.
  • Indonesia’s consumer price index decelerated to a lower-than-expected 7.3 percent in March from 7.7 percent in February, driven by lower food prices.  The trade balance in February returned to a surplus of $785 million, or 1.1 percent of GDP, significantly ahead of expectations due to a faster retreat of imports relative to exports.

Weaknesses

  • China’s final HSBC Manufacturing Purchasing Manager’s Index (PMI) for March was revised down to 48 from the previous flash reading of 48.1, the lowest level in eight months, increasing the likelihood of first-quarter GDP growth slipping below 7.5 percent, the annual growth target set by the government.
  • Brazil's central bank raised its benchmark rate by 25 basis points to 11 percent following a recent quarterly inflation report with full-year inflation and growth forecasts which were weaker than previously expected. An inflation bout caused by a rise in food prices as a severe drought hit crops has threatened to push inflation above the 6.5 percent ceiling of the official target range.
  • Greece’s Manufacturing PMI slowed to 49.7 in March from 51.3 in February, falling back below the 50-point mark that separates growth from contraction, according to Markit. Although recent data showed increases in both output and new orders, the rate of growth slowed from February’s high. A decline in new export orders, the first fall over the past three months, weighed on the inflows of new business.

Opportunities

Indonesia's Leading Presidential Candidate May Increase Infrastructure Spending Long Overdue
click to enlarge

  • According to JP Morgan strategists, emerging markets could rise 20 percent in 2014. The emerging market benchmark is currently trading at about a 35 percent discount to the U.S. markets and has the potential to narrow its discount, approaching the median level of around -20. The bank’s strategists argue that the painful depreciation in emerging market currencies last year facilitates the reduction in current account deficits, especially at a time when developed markets’ demand is accelerating. This demand should support exports and GDP growth in emerging markets.

Indonesia's Leading Presidential Candidate May Increase Infrastructure Spending Long Overdue
click to enlarge

  • Despite intermittent market concerns of a slowdown in Macau’s gaming business, year-over-year growth in the city’s casino revenue came out at 13 percent in March, and the aggregate amount for the first quarter posted another record.  The lower base in April 2013 should bode well for a potential acceleration in year-over-year growth going forward, which is positive for investor sentiment in the sector.
  • Nigeria could leap-frog South Africa to become Africa’s biggest economy this weekend, when the results of a new GDP calculation are announced. While the rebasing is more cosmetic in nature, it has the potential to increase investment opportunities in Nigeria as investors will find it hard to ignore the continent’s largest economy. The economy is projected to grow this year at a rate of 7.4 percent, according to the International Monetary Fund.

Threats

  • A potential continuation of market rotation away from momentum and growth to reversal and value could sustain the countertrend rally in structurally challenged state-owned enterprises at the expense of rapidly growing innovative franchises in the near term, especially given the introduction of a government fiscal stimulus program in China this week.
  • The Egyptian stock market’s nine-month rally that saw the market jump nearly 70 percent on bets that popular defense minister Abdel-Fattah Al-Sisi would run for the presidency has started to break down. When the news of Al-Sisi’s candidacy broke on Wednesday, many expected the market to shoot upwards; instead it lost 8.2 per cent as two bombs exploded outside Cairo University, with security forces fearing more attacks in the run-up to May elections.
  • Russia’s economy is on the brink of a technical recession after the composite PMI dropped to 47.8 last month from 50.2 in February, according to Markit Economics. While growth unexpectedly accelerated in the fourth quarter before tensions with Ukraine intensified, gross domestic output only expanded at a 1.3 percent pace in 2013, the slowest since a 2009 recession.
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