Emerging Markets Diary (June 14, 2010)
Strengths
- China’s exports climbed 48.5 percent year-over-year and 9.9 percent month-over-month in May, accelerating from April’s readings and well ahead of expectations. Imports declined by 5.1 percent month-over-month, yet maintained a 48.3 percent year-over-year pace. The trade surplus widened to $19.5 billion, the biggest amount in 7 months.
- China’s retail sales grew a higher than expected 18.7 percent year-over-year during May in nominal terms and 15.4 percent in real terms. This represents an acceleration from April in both measures, thanks to stable employment, income growth and consumption upgrades.
- Russia’s domestic sectors have proven resilient during the recent market downturn. Stocks with most domestic exposure (retailers, utilities and cellular operators) have outperformed natural resource-based sectors (steel, oil and natural gas).
Weaknesses
- China’s industrial production growth slowed to a disappointing16.5 percent year-over-year in May from 17.8 percent in April. This is consistent with a slowdown in infrastructure investment and car sales.
- The Consumer Price Index rose 3.1 percent year-over-year in May, only slightly ahead of expectations.
- Global risk aversion has been the key driver for Russian equity market performance over the last 6 weeks as concerns over China put commodity prices in limbo. Worries on the debt issues in Europe have contributed but have been less of a factor.
Opportunities
- Falling domestic stock market and deteriorating property sentiment have not discouraged Chinese consumers from leisure spending. CLSA’s latest on-the-ground survey suggests that travel remains on top of the list for Chinese consumers in the next six months with 47 percent of respondents expressing such desire in May. This is up from 35 percent in February. Online ticketing service providers should be among the major beneficiaries.
- Deutsche Bank’s research argues that the crisis in Europe could impact Turkey’s growth prospects but the upside potential of Turkey’s domestic market is greater than the downside risk of its export markets.
Threats
While property sales in May decreased by 25 percent month-over-month in 70 large and medium-sized cities in China, property prices rose 0.2 percent month-over-month and 12.4 percent year-over-year. This is mostly unchanged from April’s record high 12.8 percent. Without a meaningful drop in property prices, it is hard to envision that China’s central leadership would reverse its official stance on real estate tightening, especially when the impact on exports has not materialized in the latest macroeconomic readings.- The Russian government approved amendments to the export tax code on Thursday allowing for the implementation of a progressive tax scale. The most likely commodities to be affected are the base metals (copper, nickel, aluminum and tin).
