SWOT: Emerging Markets

Emerging Markets

Strengths

• Singapore’s exports rose 8.7 percent year-over-year in November, the first increase in 19 months. The increase was due to a surge in pharmaceuticals shipments and a moderation in the decline of electronics exports. Month-over-month growth was even stronger at a seasonally adjusted 19.8 percent.
• Annual industrial production growth in Russia returned to positive territory for the first time in over a year. According to Rosstat, industrial production rose 1.5 percent year-over-year in November.
• Mobile subscriber data from Brazil showed 1.7 million net additions during November, bringing penetration up to about 85 percent. Vivo accounted for 36 percent of net adds, followed by TIM (25 percent) and Claro (23 percent).
• Unemployment in Brazil in November fell to 7.4 percent, below the year-to-date average of 8.2 percent. Retail sales in Brazil in October rose 1.4 percent from September and 8.4 percent year-over-year. October was a sixth consecutive month of rising retail sales.

Weaknesses

• China set down-payment ratios at a minimum of 50 percent of principal with a payoff period maximum of two years for property developers to curb speculative behavior that includes land hoarding and land flipping. China also gathered vice mayors from more than 600 cities to discuss housing policy.
• October retail sales in the Czech Republic contracted 4.7 percent compared to last year. Continued recession in private consumption reflects the weak labor market in the country.
• Standard & Poor’s lowered its foreign currency investment rating for Mexico by one notch to BBB (still investment grade). The factors that contributed to the downgrade were deterioration of the country’s fiscal position, diminishing oil production and reduced GDP growth prospects.

Opportunities

• To facilitate its prospective policy shift from public spending to private consumption next year, China needs new regulatory support for consumer financing to better unleash demand for durable goods. Only 8 percent of China’s car purchases were financed through auto loans as of 2008, compared with 85 percent in the U.S. (chart below). Expanded consumer financing should benefit Chinese domestic banks as an offset to a subsequent slowdown in infrastructure lending.
  

  Chinese Car Buyers’ Leverage Incredibly Low

  	2008
  Source: CEIC, J.P. Morgan estimates.
  Spain	89%
  Italy	87%
  UK	87%
  US	85%
  EU	80%
  France	78%
  Germany	71%
  India	70%
  LatAm	60%
  China	8%

• After years of neglect, Russian retirees will see their pensions double in 2010. The pension hike, financed from National Welfare Fund, will be worth about 3.1 percent of GDP and will be spent on consumer staples.
• Banco do Brasil indicated its intention to expand abroad, possibly buying a small regional bank in the U.S. to access Brazilian expatriates.
• Mexico City government employees this week became eligible for food vouchers redeemable in the stores of Walmex, Soriana and Comerci. The program is worth around $2.1 billion pesos, roughly 2.7 percent of Walmex quarterly revenue.
• The Brazilian government held its first wind-energy auction to purchase 1,805 megawatts of wind-generated energy from 71 wind farms. The program is meant to reduce reliance on hydropower as the economy expands.

Threats

• Should the countertrend rally in the U.S. dollar be sustainable, risk aversion might revisit Asia given the longstanding negative correlation between the U.S. dollar and Asian equities. Global liquidity rotation from Asia back to the U.S. cannot be ruled out in the short term under this scenario.
• The strengthening of the U.S. dollar over the past two weeks brought back into focus the exposure of the banks in emerging markets. Lending in the Czech Republic and Turkey is traditionally done in local currency, while Polish and Russian banks face higher risk on their foreign-currency loans.
• Lower commodities prices would be a headwind for resource rich countries like Peru and Brazil.