Emerging Markets Diary (5/31/2010)

Emerging Markets Diary (5/31/2010)

Strengths

• Philippines’ GDP expanded by a much higher than expected 7.3 percent year-over-year in the first quarter, the fastest pace since the second quarter of 2007, thanks to a strong recovery in exports, overseas worker remittances, and consumer spending.
• The CPI in South Africa for April came in at 4.8 percent vs. 5.1 percent in March, partly due to the appreciation of the Rand. There are expectations that the current interest rates of 6.5 percent will likely stay unchanged till the end of the year.
• Brazil bank loans in April rose by 1.1 percent month-over-month and 17.6 percent year-over-year on the back of robust economic performance. Nonperforming loans decreased to 6.8 percent from 7 percent and compared favorably with the peak of 8.6 percent in June 2009.
• Turkish banks had a good start to 2010, beating consensus estimates by 28 percent in the first quarter. Return on equity for the banks reached 27 percent in the first quarter, compared to 21 percent in the fourth quarter of last year.

Weaknesses

• Thailand’s exports declined by 2 percent and imports by 5 percent on a month- over-month basis in April, affected by Thailand’s domestic political crisis.
• Mexico unemployment in April rose to 5.4 percent from 4.8 percent in March, likely a temporary phenomenon as the country benefits from the expansion of the U.S. economy (up 3 percent in Q1).
• Central European currencies came under pressure from the Greek debt crisis contagion. Since the beginning of the year, the Hungarian forint is down 15.6 percent, the Polish zloty is down 13.9 percent, and the Czech koruna is down 12.3 percent.

Opportunities

• The debt crisis in Europe and draconian policies in China have driven down the valuation of Asian equities to historically attractive levels earlier this week, when the price-to-earnings ratio based on profit in the next 12 months fell below the 15-year average by one standard deviation. History suggests that oversold situations like this usually harbinger positive market returns in the next 12 months.
• The auto industry in Mexico is seeking congressional approval for a 12-month suspension of the Value Added Tax (VAT) on sales of new cars. According to some estimates, a suspension of the VAT would result in a 25-30 percent reduction of the sticker prices on new cars and likely lead to a 10 percent increase in production. Strong auto production in Mexico has been one of the driving forces of an economic recovery in Mexico this year.
• The United Nations will hold its climate change forum in Cancun from November 29 to December 10 and will require at least 20,000 hotel rooms for the participants. This will be supportive of the ASUR air traffic in Cancun.
• Mr. Marek Belka, currently holding a senior position at the International Monetary Fund, will likely be nominated for President of the National Bank of Poland. We believe that the candidacy of Mr. Belka will be well received by the markets and improve the relationship between NBP and the Finance Ministry.
• Moody's service said that it may upgrade Turkey’s credit rating if the country adopts legislation on fiscal rule. The law was submitted to parliament on Thursday and will be debated in late June to early August.

Threats

• The prospect of shale gas in Europe substituting exports from the former Soviet Union states has been given much coverage in the press; however, unconventional gas resources in Europe are 7 times smaller compared to North America and are unlikely to achieve similar economies of scale.