Emerging Markets
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.
- Exports from The Philippines grew by a higher than expected 35.9 percent in July from a year earlier, driven by robust electronics sales. The nation’s stock market rose to an all-time high on Thursday, reflecting reduced country risk after its 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. According to the data from MTA, the number of taxpayers 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 away from its reliance on oil revenue. The current tax take as a proportion of GDP in Mexico stands at around 10 percent, which is well below Peru (16 percent), Argentina (20 percent) and Brazil (25 percent).
- Strong new car sales coming out from various parts of Latin America. In Colombia, in August, the sales were up 28 percent year over year, while in Chile 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 12 months ending in July, exports were up 9.2 percent in value terms and 21 percent in volume.
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 straight month despite governmental tightening policies in place since April.
- Same-store-sales at Walmex 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. Gross domestic product may rise at an annualized 2.9 percent rate in the third quarter and 2.7 percent in the fourth quarter, down from previous forecast of 3.2 percent growth.
Opportunities
China seems committed to expedite construction of affordable housing to diffuse tension from lofty home prices in major cities. Its approach includes increasing the designated land supply, expanding sources of funding and holding local officials accountable. These projects are likely to be more materials-intensive because of more units per building, so demand for construction materials may receive decent support going forward. The government has mandated that affordable housing should average 25 percent of total housing starts every year from 2010 to 2012.- Falabella of Chile sees further potential in Latin America. The company, which has currently 11 stores in Colombia, plans to open six more in that country in cities with populations between 400,000 and 1.6 million.
- Stability in Colombia is also attracting more and more institutional investors – the recent IPO of Davivienda (a financial services company) was 12 times oversubscribed.
- LAN airline is in merger discussions with TAM of Brazil, but the British press is speculating that LAN may become one of 12 acquisition targets of International Airlines Group (IAG), created by the merger of British Airways and Iberia.
- A statement from Fidel Castro that the economic system in Cuba is no longer working may be 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 -- equity markets in host nations outperform global equities (in US dollar terms) in the 12 months preceding the games, and then typically post 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 on whether policymakers are deliberating a second round of property tightening against recalcitrant home prices.
- Across the Eurozone, industrial production momentum appears to have overshot its typical association with purchasing managers’ new orders less inventories reading. This creates concern for a near-term pullback in Eastern European economic recovery.
