Emerging Markets Diary (November 1, 2010)
Strengths
- Singapore’s unemployment rate fell to a better-than-expected 2.1 percent in the third quarter, the lowest in two and a half years, from 2.2 percent in the second quarter, as its services industry continued to expand thanks to the city-state’s two casino resorts launched earlier this year.
- Thailand’s central bank raised its 2010 GDP forecast for a third time this year from 7.3 percent to 8 percent year-over-year, from July’s estimate of 6.5 percent to 7.5 percent, encouraged by surging exports despite an appreciating local currency. Moody’s also raised Thailand’s credit rating outlook to stable from negative this week.
- Barring last minute surprises, the indications are that Dilma Rouseff will emerge victorious in the second round of presidential elections in Brazil on October 31. The markets will await with great interest the news about the composition of the next government for cues about the policies to be pursued in the post-Lula era. The broad consensus is that the next government is not likely to drastically change market-friendly policies that would jeopardize the favorable status that Brazil has achieved over the last eight years.
- Credit growth in Brazil in September reached 1.8 percent month-over-month, led by mortgage lending.
- Robust revenue growth in Turkey (19.0 percent year-to-date) should be sufficient to narrow the deficit by more than 2 percent this year to 3.2 percent of GDP. Performance is similar in Russia, where the budget deficit should narrow by almost 3 percent this year to 5.7 percent of GDP, though rapid increases in expenditure over recent years leaves the underlying budget situation very vulnerable to a downturn in oil prices.
Weaknesses
- South Korea’s GDP growth slowed to a worse-than-expected 0.7 percent sequentially in the third quarter from 1.4 percent in the second quarter, as a 7.2 percent local currency appreciation during the quarter weighed on exports, in addition to U.S. unemployment and European austerity.
- Although America Movil’s third quarter results were slightly higher than expected at the Revenue/EBITDA level, the reported EPS of $0.90 came around 20 percent lower than anticipated, leading to pressure on share prices.
- In Poland the central government deficit for the eight months ending in August more than doubled, while Prime Minister Donald Tusk now admits that this year’s deficit will be in the region of 7 percent to 8 percent of GDP, largely unchanged from last year. Strong foreign demand for bonds has supported the fixed income market to date, but such fiscal policy slippage risks EU wrath as well as a sharp decline in investor confidence at some stage.
Opportunities
- China has extended its total length of high speed rail to 7,431 kilometers (4,617 miles) with this week’s launching of the Shanghai-Hangzhou line, which cuts the travel time to only 45 minutes for a distance of 202 kilometers (126 miles). The length of high speed rail is planned to reach 13,000 kilometers (8,078 miles) by 2012. By dramatically increasing the speed of travel, China’s high speed rail may benefit sectors such as retail, restaurants and tourism because of the “one-city effect,” and in the long run, may have profound implications on labor mobility within the country.
- After a period of mourning following the death of Argentina’s former President, Nestor Kirchner, we expect a period of political instability in the short term, but a more market-friendly policy in the longer term, particularly after the election scheduled for October 2011. It remains to be seen if Christina Kirchner will run for president next year, a scenario that market participants might fear. However, we believe that a more conciliatory candidate, Carlos Reutemann (former governor of Santa Fe), might emerge and provide more stability for the country.
- After a period of mourning following the death of Argentina’s former President, Nestor Kirchner, we expect a period of political instability in the short term, but a more market-friendly policy in the longer term, particularly after the election scheduled for October 2011. It remains to be seen if Christina Kirchner will run for president next year, a scenario that market participants might fear. However, we believe that a more conciliatory candidate, Carlos Reutemann (former governor of Santa Fe), might emerge and provide more stability for the country.
- LAN, Chile’s airline, will purchase a controlling stake in Aires, the second largest airline of Colombia, where it has a 22 percent market share. We expect more competition in Colombia which should be advantageous for airline travelers.
- The acquisition streak by emerging market companies in the developed markets continues – Grupo Bimbo of Mexico is considering a purchase of Sara Lee’s baking assets in the U.S. for $1.3 billion.
- Emerging markets have historically exhibited very strong fourth quarter seasonality, according to Credit Suisse research. Since 1988 the fourth quarter has, on average, delivered a price return for the overall MSCI Emerging Markets Index of 6.0 percent, versus 4.7 percent for the first quarter, 3.7 percent for the second quarter and just 0.2 percent for the third quarter. Even during the 2008-2009 global financial crisis, the index returns were negative for all the months from June 2008 through February 2009, with the sole exception of December 2008 which posted a positive return of 7.6 percent. Strong fourth quarter seasonality is exhibited particularly by Turkey, Hungary and Russia.
Threats
- Rising prices for industrial metals and reaccelerating local currency appreciation in recent months may squeeze profit margins for export-oriented Chinese manufacturers going forward.
- The Czech Republic opposition Social Democrats won 12 seats in Senate elections, securing a majority in the chamber that may threaten the coalition government’s steps to cut the budget deficit, according to Bloomberg. The government had pledged to cut the budget deficit to the EU limit of 3 percent of economic output by 2013 from 5.8 percent last year.
