Emerging Markets Diary (June 7, 2010)

Emerging Markets Diary (June 7, 2010)

Strengths

• South Korea’s exports climbed 41.9 percent year-over-year in May, better than expected thanks to still robust demand from China and the U.S. The Bank of Korea revised up first quarter GDP growth to 2.1 percent quarter-over-quarter from its April estimate of 1.8 percent.
• Macau’s casino revenue almost doubled in May to $2.1 billion from a year earlier, representing a 22 percent rise month-over-month, driven by surging VIP gaming.
• ASUR traffic in May increased by 86 percent year-over-year, mainly thanks to a low base effect in May 2009 due to the flu scare. Compared to May 2008, the traffic declined by 8.5 percent.
• Mexico consumer confidence index in May rose to 84.6 from 82.3 in April.
• Russia’s economy expanded last month at the fastest pace since November 2008 as companies continued hiring and domestic demand accelerated, according to VTB Capital GDP rose an annual 2 percent, after 1.2 percent growth in April.
• The Russian jobless rate in April fell to 8.2 percent from 8.6 percent a month earlier, while retail sales rose for a fourth month, jumping 4.2 percent after growing 2.9 percent in March.
• Turkey’s exports in May increased an annual 25 percent to USD 9.07 billion, despite the plunge of the euro value of its exports. Cumulatively, Turkey’s exports reached USD 44.15 billion in the first five months of the year.
• Meanwhile, Turkish May manufacturing PMI rose to 56.5 from 56.0 in April. The index recorded the highest value since the survey began in June, extending its growth run to a thirteenth consecutive month. The rise in the PMI is largely due to increasing domestic demand.
• Some 9.4 million passengers travelled through airports in Turkey in May, up 25 percent from last year, according to state airports authority. Istanbul Ataturk airport saw twice the increase of international passengers (+14 percent), compared to domestic travelers (+7 percent).

Weaknesses

• The official and private China Manufacturing Purchasing Managers’ Index declined to 53.9 and 52.7, respectively, in May from 55.7 and 55.2, respectively, in April. This partly reflects ongoing uncertainty in Europe and weakened outlook for China’s property market, which resulted in lower new orders.
• China registered 885,800 in passenger car sales in May, representing a continued slowdown in year over year growth to 25 percent from April’s 34 percent, due to diminishing wealth effect from a slumping domestic stock market.
• Domestic car sales in Brazil in May declined by 10 percent month-over-month, which was attributable to the end of a tax incentive in March.
• Bank Credit Analyst research highlights that Hungary has been in a classic debt deflation, as its nominal GDP has been contracting while government borrowing costs have held above 6 percent. Hungary’s domestic demand has been contracting for three years and the current government is planning to reflate via massive interest rate cuts, fiscal spending, and a weaker currency.

Opportunities

• Recent wage increases in some Chinese cities following media reports of worker suicides and strikes are congruent with the central government’s commitment to promote consumption, especially when exports to Europe might fade and a difficult real estate market could discourage investment. Soon after rolling over auto subsidies, China extended the existing “old-for-new” home appliance subsidy program to December 31, 2011, and expanded program coverage to include 19 additional provinces, mostly inland regions where rapid urbanization is occurring, to reach 85 percent of total population.

• Telefonica of Spain raised its offer for Portugal Telecom’s (PT) stake in Vivo to EUR 6.5 billion from EUR 5.7 billion. Unlike the previous offers that had been rejected outright, the board of PT will vote on the latest offer, which, if accepted, would resolve a long lasting dispute between PT and Telefonica about the future strategy of Vivo.
• In light of recent production issues with BP’s well in the Gulf of Mexico, followed by the U.S. government’s ban on deepwater exploration drilling, the relative cost advantages of Russian onshore producers will become more evident, according to Renaissance Capital, and the valuation gap to the global peer group should start to close.

• The IMF recently revised its 2010 GDP forecast for Turkey to 6.25 percent from 5.2 percent, and the Organisation for Economic Co-operation and Development (OECD) is expecting Turkey’s economy to grow 6.8 percent.

Threats

• The latest reduction of steel product prices by China’s largest steelmaker can be an initial sign of the ripple effect of tightening policies in the country’s real estate sector. Activities related to property construction and sales are at the risk of slowdown given no official backtrack in restraining the property market.
• GAP airport group in Mexico was suspended both on the NYSE and Mexican Bolsa after reports that its chairman and independent directors were removed. Apparently the company installed 7 temporary directors and is working with the exchanges to resolve the situation “expeditiously.”
• Current rosy projections for demand growth for both electricity and gas in Russia and Poland are unrealistic, argues Troika Dialog. Simple economics would imply that when prices for very cheap goods like gas and electricity rise, then demand will fall as consumers economize.