Emerging Markets Diary (October 18, 2010)
Strengths
- China’s passenger car sales accelerated in September, rising 19.3 percent month-over-month thanks to an expanding list of subsidies for energy efficient cars and rising concerns that some auto stimulus might be phased out next year.
- China’s foreign exchange reserve surged to a record $2.65 trillion as of the end of September, adding another $194 billion in the third quarter and $101 billion in September. The surge was a result of a stronger euro, Japanese yen and British pound, as well as, net inflows of overseas capital.
- Aviation traffic in Brazil in September grew by 30 percent year-over-year in the domestic segment and 27 percent in the international segment. Brazilians are clearly travelling more internationally to take advantage of the strength in the Brazilian currency.
- Retailers in Brazil continue to post solid numbers—CPD Pao de Acucar posted a 12.5 percent increase in same-store sales during the third quarter, while Hering recorded a 35 percent rise.
Weaknesses
- Brisa, the Portuguese toll-road operator sold a 3 percent stake in the Brazilian toll road operator CCR, wiping out 8.2 percent of the market capitalization in a single day. We expect some stock overhang until the end of the year as Brisa gradually reduces its 10 percent stake in CCR.
Opportunities
- Anticipation of a fresh round of quantitative easing in the developed world may have already triggered a comeback of foreign capital flows into Emerging Asian markets as investors seek higher returns and sounder currencies. Indeed, positive correlations exist between foreign capital inflows and Asian equity market performance in the past five years. Foreign liquidity may benefit some of the regional laggards, especially China, betting on an economic soft landing and further yuan appreciation.
- America Movil is rumored to increase the company’s share buyback program, as well as, propose higher dividends as the company accumulates cash on the balance sheet. Most recently, the company had $12.5 billion on its balance sheet.
Threats
- With September housing prices and transactions recovering in China, especially in first- and second-tier cities, and the prospect of domestic interest rate hikes diminishing, further upward pressure on housing prices is tangible and might sustain investor perception of more draconian government policies toward the property sector.
- There are fears that Televisa in Mexico is likely to walk away from its planned $1.44 billion investment in NII Holdings, which would give it a 30 percent stake in Nextel Holdings and create the first quadruple play in Latin America.
- HSBC is believed to not be bidding for a stake in South Africa’s Nedbank after performing due diligence on the company. The company’s stock declined 7 percent on the news.
