Emerging Markets Diary (July 12, 2010)
Strengths
- China’s central bank indicated that its monetary policy would remain appropriate and accommodative in the second half of this year. In the past seven weeks, through open market operations, its net injection into the banking system reached RMB 938 billion, offsetting the effect of three reserve requirement hikes so far this year.
- Thailand’s consumer confidence rose for a second consecutive month to 69.1 in June from 67.6 in May, thanks to continued economic recovery and stabilizing political situation.
- Philippines’ consumer price index slowed for a second month to 3.9 percent year over year in June from 4.3 percent in May. The International Monetary Fund (IMF) raised its 2010 GDP forecast for Philippines to 6 percent from 3.6 percent estimated previously in April.
- May industrial production in Turkey registered a 15.6 percent increase year-over- year after posting a 17.3 percent increase in April. Production increase in export-oriented sectors, such as motor vehicles (26.0 percent year-over-year), textile (22.1 percent year-over-year), plastics (22.6 percent year-over-year), machinery (24.1 percent year-over-year), and electrical machinery (57.1 percent year-over-year) sectors, was the main culprit behind the sharp production increase.
Weaknesses
- China posted 1.04 million units in passenger car sales in June, representing a slowdown in year-over-year growth to 19.4 percent, a 14-month low, from May’s 25 percent and April’s 34 percent.
- Singapore’s manufacturing Purchasing Managers’ Index declined to 51.3 in June from 52.2 in May, reflecting a slowdown in global manufacturing orders and potentially softening economic expansion in the second half of this year.
- Both Malaysia and South Korea raised benchmark interest rates by 25 basis points to 2.75 percent and 2.25 percent, respectively, as a preemptive move to restore borrowing cost to a more appropriate level.
- Hungarians resorted to franc-denominated loans during the boom years last decade to escape high domestic interest rates. The surge in the Swiss franc, which has gained as much as 27 percent in the past year versus the forint, has deepened Hungary’s recession by as much as 2.5 percentage points, by Nomura Securities estimates. Hungarian government’s measure to ban mortgage contracts on foreign currency denominated loans effective from July will wipe out remaining retail lending activity in Swiss franc and euro.
Opportunities
- China will suspend all other initial public offerings (IPOs) in the domestic A Share market for one week to facilitate a decent trading debut of Agricultural Bank of China, fourth largest state owned bank in the country. The government’s market friendly behavior coincides with a historically close-to-extremely-oversold condition in domestic A Share stocks, which may continue to help improve sentiment towards Chinese companies traded in Hong Kong and the U.S.
- Turkish CPI dropped 0.56 percent in June and annual inflation eased to 8.4 percent from 9.1 percent, prompting Morgan Stanley to change their interest rate forecast call to no policy rate hikes in 2010. Continued low interest rate environment could potentially extend the rally in financials.
Threats
- Even though the resource tax China plans to impose for oil, natural gas, and coal in its western provinces is part of an effort to promote regional growth by strengthening local government coffers, this policy, with the potential to be expanded nationally, is likely to negatively affect profitability of upstream energy producers in China.
- Eastern European exports to Germany are largely semi-finished goods refined further for destinations outside the Eurpean Union, making them less prone to shifts in Europe’s largest economy. Weaker euro made finished export goods are more competitive with Czech Republic, Slovakia, and Hungary registering strong growth in industrial production in May.
