Emerging Markets Diary (August 9, 2010)
Strengths
- China’s official non-manufacturing Purchasing Managers’ Index (PMI) climbed to 60.1 in July from 57.4 in June, indicating a fifth consecutive month of expansionary activity in service industries.
- Macau’s casino revenue surged 70 percent year-over-year to $2 billion in July, representing 20 percent growth month over month, as bettors returned from gambling on the World Cup soccer games.
- South Korea’s exports continued to surprise on the upside, increasing 29.6 percent in July from a year earlier, as the global recovery remained resilient and contagion from the European debt crisis stayed limited.
- Indonesia’s GDP expanded 6.2 percent year-over-year in the second quarter, faster than expected and accelerating from 5.7 percent in the first quarter, thanks to strengthening investments and rising consumer spending.
- Domestic auto sales in Turkey rose 113 percent year-over-year in July, climbing to 339.6 units. Historically low rates have become a major driver of auto sales, according to Merrill Lynch, and this appears to be borne out month-after-month.
Weaknesses
- China’s official manufacturing Purchasing Managers’ Index (PMI) declined to a 17-month low of 51.2 in July, lower than expected, from 52.1 in June. The private HSBC China manufacturing PMI fell into contractive territory at 49.4 in July from 50.4 in June. The combined effect from the ongoing property tightening and energy-intensive plant closures contributed to the slowdown, apart from seasonal weakness.
- China’s total vehicles sales decreased 6.7 percent month over month to 1.06 million units in July, a third straight sequential decline, with inventories rose to 58 days from 55 days in June. Passenger car sales declined 3.4 percent month over month.
- Russia, crippled by drought, banned all exports of grain after millions of acres of Russian wheat withered in a severe drought. Pressure was also brought to bear by multinational grain trading companies, who, according to Bloomberg, have been lobbying for the ban so that they could declare force majeure, to escape their obligation to deliver.
Opportunities
- Despite Indonesia’s 21 percent rally since the beginning of the year, the top performance in Asia, the country’s stock market capitalization remains one of the smallest as a percentage of GDP among major emerging markets. With low indebtedness, rich natural resources, political stability, appreciating currency, and a less export-dependent domestic economy, Indonesia may continue to attract foreign investors.
- Exchange rate appreciation is the likely policy response should grain shortages drive food inflation higher in Russia. Forward contracts on the ruble were bid up to their highest level in three months, as central bank scaled back purchases of foreign currencies.
Threats
- Chinese authorities do not seem complacent about reining in property speculation, with recent news on bank stress testing under a worst case scenario of 60 percent decline in property prices, suspension of mortgages for third home purchases in first tier cities, and increase of down payments to 60 percent and mortgage rates to 1.5 times the benchmark rate in other cities.
- Grain export ban could negatively affect food producers in Russia, as well as the operators of export grain terminals. Distillers and brewers may also see their feedstock costs go higher.
