Emerging Markets Notebook (5/24/2010)
Strengths
- Thanks to a strong rebound in global trade and the mainland Chinese economy, Taiwan’s GDP expanded 13.3 percent year-over-year in the first quarter. This better-than-expected pace is the fastest in more than 30 years. During the same quarter, mainland Chinese visitors to Taiwan outnumbered Japanese for the first time due to relaxed travel rules.
- Robust Asian demand and a recovery in the U.S. helped Singapore’s GDP rise 15.5 percent in the first quarter from a year earlier. The rise was stronger than market expectations and the government estimate.
- Dubai World announced on Thursday that it had reached an agreement in principle with 60 percent of creditors regarding $14.4 billion in outstanding bank debt. The deal will also pave the way to the injection of $9.1 billion in fresh funds by the Dubai Financial Support Fund (DFSF) into Nakheel and Dubai World. This will provide a much-needed boost to the construction and real estate sectors in Dubai.
Weaknesses
- Indonesia, one of the best performing markets over the past 12 months, was one of the worst performers in emerging Asia this past week, as foreign investors were active in taking profits.
- Hungary and Czech Republic are the most dependent of Eastern European countries on exports to the European Union and recent euro weakness negatively affects profitability of those exports, according to Citi research.
Opportunities
- Investor risk aversion has surged globally in the last two weeks and may continue to benefit defensive sectors and those sectors receiving government policy support. The Chinese healthcare sector qualifies for both. Government healthcare spending is still less than 5 percent of GDP in China, compared with 8-10 percent in developed countries and 6 percent on average in emerging markets. Secular growth opportunities exist due to the significant role healthcare plays in facilitating China’s transition from investment /export-led economy to a consumption-led one.
- Citi research suggests that any euro-to-zloty exchange rate above 3.6 makes Polish exports competitive in foreign markets. The rate currently stands at 4.1, which should help boost exports in the coming months.
Threats
- While the decline in Chinese residential property transaction volume has accelerated in the first half of May, prices have managed to remain stable, suggesting only limited success of government intervention since mid-April. The gridlock might persist in the short run, as potential buyers are not in a rush to purchase. In addition, developers flush with cash would prefer to wait and see through this cycle. The European situation brings hope that the Chinese policymakers might ease tightening measures but the longer the status quo is kept, the less assurance the market receives.
After an 18 percent rise in April, activity in the construction sector of Poland and the Czech Republic is likely to slow due to heavy rains and flooding. The area affected by floods in Poland is responsible for 35 percent of the country’s gross domestic product.
