Emerging Markets Diary (September 13, 2010)

Emerging Markets Diary (September 13, 2010)

Jack Dzierwa, co-manager of the Global MegaTrends Fund (MEGAX) and Global Emerging Markets Funds (GEMFX), recently went searching for investment opportunities in Latin America. Over the course of one month, Jack visited Mexico and three countries that Jack calls the “ABCs of Latin America”—Argentina, Brazil and Chile. Jack sat down with our video team for a series of videos recapping what he observed. Watch the interview clips here.

Strengths

• Indonesia’s foreign exchange reserve reached $81.3 billion in August, representing an increase of $15 billion year to date, thanks to rising foreign direct investment as well as portfolio inflows attracted by an outperforming stock market and strengthening currency.
• Philippines’exports grew by a higher than expected 35.9 percent in July from a year earlier, driven by robust electronics sales. The Philippine stock market rose to an all time high on Thursday, reflecting reduced country risk profile after the presidential election, improving macroeconomic data, and better earnings outlook.
• China’s imports in August registered a better than expected rebound to 35 percent year-over-year from July’s 23 percent, led by imports of machinery, electronic equipment, and autos. Imports from Southeast Asia, the U.S., and Japan contributed to the rebound.
• Thailand’s consumer confidence increased to a 28-month high of 72.8 in August from 71.4 in July, owing to improving economic growth outlook.
• While the recent news from Mexico is dominated by escalating violence, a positive development this week came up from the Mexican Tax Agency (MTA). According to the data from MTA, the number of tax payers in Mexico this year will likely reach 35 million, compared with 26.4 million last year. This is an optimistic trend as the country wants to diversify its reliance on oil revenue. The current tax take as a proportion of GDP in Mexico stands at around 10 percent and is well below Peru (16 percent), Argentina (20 percent) and Brazil (25 percent).
• Strong new car sales are coming out from various parts of Latin America. In Colombia, in August, the sales were up 28 percent year-over-year, while in Chile the sales were up 61 percent.
• It appears that Chilean wine exporters are faring quite well despite appreciation of the peso (10 percent YTD)—for the twelve months ending July, exports were up 9.2 percent in value terms and 21 percent in volume.
• Russian companies are taking advantage of a plunge in interest rates to triple borrowing.

Weaknesses

• Malaysia’s industrial production rose a slower than estimated 3.2 percent year- over-year in July, consistent with a slowdown in exports, especially to Japan, the U.S. and China.
• Although the increase of average property prices in 70 major cities in China continued to moderate on a year-over-year basis in August, decelerating to 9.3 percent from July’s 10.3 percent, absolute price levels remained unchanged for a third month sequentially despite the government’s tightening measures since April.
• Walmex’ same-store-sales in August were up 1.5 percent, weaker than the consensus estimate of 3 percent.
• The worse than expected global economic recovery is affecting the domestic recovery in Russia, according to Renaissance Capital report. Gross domestic product may rise at annualized 2.9 percent rate in the third quarter and 2.7 percent in the fourth quarter, down from the previous forecast of 3.2 percent growth.

Opportunities

• China seems committed to expedite construction of affordable housing, which has been only a fraction of total completions in the last decade. This is to diffuse tension from lofty home prices in major cities by increasing designated land supply, expanding sources of funding, and holding local officials accountable. As affordable units are typically much smaller than the average model sold on the market, these projects are likely to be more materials intensive because of more units per building. Given government’s aggressive target that affordable housing should average 25 percent of total housing starts every year from 2010 to 2012, demand for construction materials may receive decent support going forward.
• Falabella of Chile sees further potential in Latin America. The company, which currently has 11 stores in Colombia, plans to open an additional six in that country in smaller cities with populations of 400,000-1.6 million.
• Stability in Colombia is also attracting more and more institutional investors—the recent IPO of Davivienda (financial services company) was 12 times oversubscribed
• Will LAN airline, which is in the merger discussions with TAM of Brazil, become an acquisition target of International Airlines Group (IAG), created by the merger of British Airways and Iberia? The British press speculates that LAN is on top of 12 potential targets of IAG.
• We regard the statement from Fidel Castro that the economic system in Cuba is no longer working as a prelude to forthcoming reforms in the country. The Cuban government has been gradually relaxing its stronghold on the economy and we remain hopeful that a greater opening of the country will lead to much needed investment and transformation.
• In the build up to Poland’s co-hosting of the June 2012 European Soccer Championship tournament, Credit Suisse points out that there has been an established pattern over the past eight world cup tournaments for host nations’ equity markets to outperform global equities (in U.S. dollar terms) in the 12 months preceding the games, with typically poor relative performance in the aftermath. This year’s host, South Africa, has not been an exception.

Threats

• Rising inflation expectations recently in China might contribute to more policy rumors and market volatility, especially when there is little clarity of whether policymakers are deliberating on a second round of property tightening against recalcitrant home prices.
• Across the Eurozone, industrial production momentum appears to have overshot its typical association with PMI new orders less inventories reading, creating a concern for a near term pullback in Eastern European economic recovery.