Emerging Markets Diary (August 30, 2010)
Strengths
- Thailand’s GDP expanded by a higher-than-expected 9.1 percent in the second quarter from a year earlier, as surging exports helped offset the impact of political turmoil.
- Second-quarter GDP rose 7.9 percent year over year in The Philippines, exceeding consensus estimates. Growth was driven by higher fixed-asset investment, especially in construction, and government spending.
GDP and consumption levels in dollar terms place Russia on par with Brazil and India, according to Troika Dialog research. Data from the Brookings Institution imply that Russia actually has the largest middle-class consumption among the BRIC nations, which supports the consumer sector investment theme.- The Brazilian corporate and retail investors still continue to borrow—the data from July show 18 percent growth of outstanding loans year over year.
- -The unemployment rate in Brazil in July declined to 6.9 percent from 7 percent in June. With the latest inflation data at 4.4 percent, below the official target of 4.5 percent, the market expectations are that the current interest rates of 10.75 percent are unlikely to change by year-end
- Investors continue to be attracted by the prospects of Brazil. Shell and Cosan set up a joint venture to produce sugar and ethanol and to consolidate the fuel distribution in the country. The combined entity will have an 18 percent market share in the fuel distribution, behind Petrobras (34 percent) and Ultrapar (21 percent)
- Retail sales in the greater Santiago area in July increased by 25 percent year over year. The Central Bank of Chile updated a previously forecast GDP growth of 4 percent to 5 percent, saying it is more likely to reach 6.5 percent
Weaknesses
- Hong Kong’s July exports increased by a slower-than-expected 23.3 percent year over year, while imports grew a less-than-estimated 24.9 percent year over year, reflecting a slowdown in China.
- According to WINDS database, out of 90 Chinese property developers listed in Shanghai and Shenzhen that have reported first-half results, close to two-thirds show negative operating cash flows. A similar ratio was last seen in the middle of 2008.
- Russia’s ministry of economy estimated that the drought will shave off at least 0.4 percent to 0.5 percent from GDP growth this year. According to Reuters, potential total effect on the economy could be 0.7 percent to 0.8 percent being slashed from GDP growth.
- An appreciating Chilean peso (up 3.3 percent against the U.S. dollar last month) is causing strain for many Chilean exporters. The Central Bank rejected an intervention call at this stage, saying the currency strength is a reflection of the strength of the Chilean economy
Opportunities
- The 60-mile traffic jam in Northern China since August 14 is attributable to coal transportation to meet higher demand for power generation because of unusually hot weather. The provinces of Inner Mongolia, Shanxi and Shaanxi account for half of China’s coal production. Truck transportation to coastal regions has added tremendous pressure on highway infrastructure. These bottlenecks highlight the longer-term need for more infrastructure construction in the hinterlands and shorter-term opportunity for higher coal prices.
- Russian car deliveries increased 9 percent in the first seven months of the year and jumped 48 percent in July, compared to first-half year sales growth of 0.6 percent in the rest of Europe.
- The Venezuelan government will cancel $200 million in outstanding debt of Colombian exporters. Although the two countries represent very divergent political systems, their trade relations remain strong
- HSBC is reported to be bidding for a controlling stake in Nedbank, the fourth-largest bank in South Africa. It remains to be seen whether the South African authorities will authorize such a transaction after holding ICBC (of China) to a 20-percent stake in Standard Bank
- Time Warner bought a stake in Chilevision, the local free-to-air TV network, for around $150 million. It remains to be seen how Time Warner, which already operates in Chile through CNN, will reposition its strategy in the country
Threats
- Deteriorating U.S. economic data, including housing sales and unemployment, might weigh on investor sentiment toward Asian countries that have largely relied on exports for the current recovery.
- The constitutional referendum on September 12 could limit potential upside in Turkish equities until the outcome is known. Historically, market performance was hindered by the prospect of a coalition government.
- Mexico continues to battle to restore stability while conducting its war on drugs.
