Emerging Markets Diary (November 8, 2010)
Strengths
- Shanghai's World Expo came to a close on October 31. The expo attracted 73.1 million visitors in six months, surpassing the 1970 record of 64 million for the expo held in Osaka, Japan. It's believed the expo generated $12 billion in tourism spending for Shanghai and neighboring regions. In addition, a $44 billion infrastructure renovation has helped Shanghai become China's most prosperous city over the last eight years.
- China's official Purchasing Managers' Index (PMI) rose to a higher-than-expected 54.7 in October from 53.8 in September, and the HSBC PMI jumped to 54.8 from 52.9. Both reflected greater industrial activity, thanks to construction of affordable homes and accelerated work on stimulus projects.
- South Korea's exports in October surprised to the upside, registering 29.9 percent year-over-year growth and accelerating from 16.5 percent in September. The jump was driven by resilient demand from China and other emerging markets for machinery, automobiles and semiconductors.
- The global macro backdrop is more supportive of Turkey than other emerging economies, according to BCA Research. There is no froth in the property market or in consumer spending. In addition, construction and car sales are picking up from low levels.
Weaknesses
- Malaysia's growth in exports slowed to 6.8 percent year-over-year in September from 10.6 percent in August. This is the sixth consecutive month of deceleration, due to declining electronics shipments.
- Indonesia's GDP expanded by a less-than-expected 5.8 percent during the third quarter compared with a year ago. The soft rise was due to weaker exports and disrupted agricultural and mining activities because of heavy rains.
- South Korea's consumer price index rose to a 20-month high of 4.1 percent in October from a year earlier. This higher-than-expected rise was led by higher food and fuel prices.
- The speed of recovery disappoints in Russia. Unusually hot weather hit agricultural production during the third quarter, forcing a decline of 18.6 percent on a year-over-year basis. This also adversely affected export revenues. Citi research suggests that Russia's growth is unlikely to exceed 4 to 4.5 percent in the long run due to falling oil production, withdrawal of the fiscal stimulus and falling labor supply.
Opportunities
- Given a pegged local currency to the U.S. dollar, minimal controls on foreign capital and proximity to the mainland Chinese economy, Hong Kong may continue to adopt the same monetary policy as the U.S. Additionally, Hong Kong could turn out to be a major destination for excess foreign liquidity induced by quantitative easing in developed countries around the world. Relative to bonds and physical property, Hong Kong stock valuations currently appear closer to the most attractive levels in the past decade, aside from late 2008 through early 2009.
- A number of regional analysts voiced their concern over recent Turkish lira appreciation. However, BCA research points out that the currency has cheapened relative to other emerging market currencies and Turkey's export sector is under less pressure from currency appreciation than other parts of the developing world.
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.
