Emerging Markets Diary (August 2, 2010)

Emerging Markets Diary (August 2, 2010)

Strengths

  • South Korea’s GDP expanded by a faster than expected 1.5 percent quarter-over- quarter, or 7.2 percent year-over-year, in the second quarter, driven by strong exports of automobiles, semiconductors, and machinery. Consumer confidence held at a five month high of 112 in July.
  • Profits at China’s large industrial companies in 24 regions climbed 71.8 percent year over year to RMB 1.61 trillion in the first half of this year.
  • China’s land supply for residential real estate construction increased 113 percent in the first half compared with a year ago, while the average price of residential land declined 10.6 percent sequentially in the second quarter.
  • The Indonesian rupiah appreciated to a three-year high on Thursday against the U.S. dollar, as the local stock market rose to a record high and government forecasted 6 percent GDP growth in the second half of this year.
  • Lojas Renner, one of the largest Brazilian retailers, reported strong 2Q results that were boosted by better procurement practices that resulted in an improvement in the earnings before interest, taxes, depreciation and amortization (EBITDA) margin to 24.8 percent from 17.8 percent a year earlier.
  • OHL toll road group in Brazil reported a 29 percent traffic growth in 2Q brought about by an economic recovery in the country.
  • Chilean banks, Banco de Chile and Santander Chile, also reported strong 2Q results with net income growing 57 percent year-over-year.
  • Hungary sold more debt than planned at an auction of three month Treasury bills on Wednesday as traders said yields were attractive given the interest rate outlook, according to Bloomberg.

Weaknesses

  • China’s new loans to property developers fell 62 percent sequentially in the second quarter to RMB 122 billion, representing a 32 percent decrease year-over- year, as banks intentionally reduced balance sheet exposure to the property sector as a result of credit control and risk management.
  • Vietnam’s long term foreign and local currency debt ratings were reduced by Fitch Ratings to B+ from BB-, due to concerns over declining foreign reserves and weak banking system.
  • The capital output ratio defined as the investment portion of GDP divided by real GDP growth measures how much investment is needed to produce GDP growth, the higher the ratio, the more inefficient the investment. As the chart shows, the efficiency of Russia’s investment into economy was particularly wasteful under socialism. It has now reached a stable state at around 4 times (equal to that of China), which is below the world average at 3 times.

Russia Balanced Model

Opportunities

  • Although China’s domestic A share market staged a close to 10 percent rebound in July, the best performer in Asia for the month, Chinese mutual funds by and large did not participate in the rally. These mutual funds, together with domestic insurance companies who are expected to be approved to raise allocation to equities in August, may provide liquidity support for a continued recovery in Chinese domestically listed stocks.
  • A recent M&A activity in the Brazilian telecom sector has created three major fully integrated players – America Movil, Telefonica and Oi, that should offer bundled products (fixed line, wireless and pay TV) at a reduced cost for customers.
  • We have noted an inflow into the Chilean equity market by the local pension funds that scaled down their international exposure and boosted valuations of the Santiago bourse.
  • The IMF’s new loan agreement for $15 billion requires fiscal policy changes from Ukraine aimed at lowering the deficit to 5.5 percent of GDP in 2010 and 3.5 percent in 2011. The IMF’s renewed engagement with Ukraine opens up the possibility of loans from the European Commission and the World Bank, according to RGE Monitor.

Threats

  • In addition to ongoing property tightening, Chinese government’s goal to reduce energy consumption per unit of real GDP by over 5 percent this year from 2009, as mandated by its 11th Five Year Plan, may result in more plant closures, as a matter of expediency, especially in heavy industries, and a slowdown in economic activity in the second half of this year.
  • Macquarie Airports indicated that they will be selling its 14 percent stake in ASUR. At this point it remains uncertain who the buyer might be but the transaction may well improve liquidity in the ASUR shares.
  • On Thursday, the Russian government finalized its list of companies to be privatized in 2011-2013, and the amount it is planning to raise through these privatizations is close to $35 billion US dollars. The slope of the regression line of Russian Trading System market returns vs. total IPO issuance is negative, suggesting that a large supply of state’s shares could have a negative impact on the market.

Russia IPO Issuance Mkt Performance

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