Emerging Markets Diary (November 15, 2010)
Strengths
- China’s passenger car sales rose 27 percent year-over-year to 1.2 million units in October, the fastest pace in six months, driven by end-of-year government purchases as well as speculation that car-buying incentives may be reduced or eliminated next year.
- Moody’s raised China’s debt rating to Aa3, its fourth-highest ranking, from A1, citing the country’s resilient economic growth and likely containment and effective management of losses from record lending in 2009 to combat the global financial crisis. Hong Kong’s rating was also raised to Aa1 from Aa2.
- Hong Kong’s GDP expanded by a faster-than-estimated 6.8 percent year-over-year in the third quarter, accelerating from the second quarter’s 6.5 percent, thanks to robust service exports and household consumption.
- LAN, the Chilean air carrier, announced strong traffic data for October with passenger traffic rising by 15.9 percent year-over-year and cargo volume rising by 18.5 percent year-over-year.
- Various emerging market companies continue to expand beyond their borders – most recently Bimbo of Mexico announced an acquisition of Sara Lee’s North American bakery business for $959 million. Investors seemed to approve of this move with Bimbo’s shares up 5 percent on the news.
- Walmex’s same-store-sales (SSS) in October increased by 4.2 percent year-over-year with a 2.6 percent higher average ticket size.
- Higher sugar prices, up 42 percent during the third quarter, are benefiting some Brazilian sugar/ethanol producers. Cosan this week announced strong third quarter results with EBITDA coming in 30 percent above expectations.
- Hungary’s economic growth accelerated in the third quarter as rising domestic consumption and increasing export demand in Western Europe is helping the country recover from its worst recession in 18 years. GDP grew an annual 1.6 percent after expanding 1 percent in the second quarter, according to Bloomberg.
Weaknesses
- China raised required reserve ratios for all banks by 50 basis points and an extra 50 basis points for six large banks in an effort to drain excess liquidity in the banking system and better manage inflation expectations.
- China’s Consumer Price Index (CPI) rose by a higher-than-expected 4.4 percent in October from a year earlier and by 0.7 percent from September, attributable to a 10.1 percent year-over-year increase in food prices, the first double-digit gain since August 2008.
- Thailand’s consumer confidence dropped to 71.6 in October from 73.5 in September, the first decline in six months, as the local currency strengthened to a 13-year high against the U.S. dollar and the worst floods in five decades impacted the agricultural sector.
- We are watching for rising inflationary expectations around the world—Brazil’s October CPI came in at 5.2 percent compared with 4.7 percent in September, with higher food prices the main contributor.
- The Hungarian government’s budget plan includes revenue projections for a special tax on selected industries to last through 2014, instead of ending a temporary levy after 2012 as previously announced.
Opportunities
- Incipient fears over government policy tightening in China may trigger sector rotation into more defensive industries such as healthcare. With the Chinese government-spending on healthcare reaching RMB 297.8 billion in October, representing an accelerated growth rate of 63 percent versus last year, local medical equipment makers should benefit the most due to a government policy focus on expanding hospitals across the country.
- A study by the Chilean Copper Commission estimates that by 2020, India will become the world’s second-largest copper consumer, versus its current position in sixth place behind China, the U.S., Germany, South Korea and Japan. The expectations are that the current annual consumption by India of around 610,000 tones will rise to 2.4-3.6 million tones. By comparison, China currently consumes around 6 million tones of copper annually.
- While Zimbabwe has remained a non-entry place for many investors, there are more and more indications that the country is warming up to the entry of international companies. In the latest move, Essar Group of India is reportedly paying around $500 million for a 54 percent stake in Zisco, the local steel manufacturer, which has the capacity to produce 1 million tones of steel.
- According to the Mexican press, there are three private equity groups interested in resurrecting Mexicana, the bankrupt airline. Any deal will have to be approved by the unions representing pilots, ground service and air hostesses; we understand that there are some labor liabilities that may pose a stumbling block.
- Hungary, which escaped having it debt rating cut to junk by Standard & Poor’s last week, is underappreciated by investors given its fiscal performance, Royal Bank of Canada said. The chart below shows that Hungary will be the only country in Eastern Europe to run a budget surplus this year and next.
Threats
- The prospect of China’s headline inflation to remain above 4 percent in the near future makes the specter of government price controls loom large, given China’s track record of pricing intervention when inflation of consumer items exceeded 4 percent on a year-over-year basis as recently as in 2004, 2007 and 2008. If price controls are brought to bear again, investor sentiment might turn negative towards producers of such consumer necessities as food, fuel and electricity.
- The Central Bank of Turkey raised the reserve requirement ratio on lira deposits to 6 percent, which should drain market liquidity by 2.1 billion, according to J.P. Morgan. The monetary policy committee voiced its concern over fast loan growth and worsening external balances, in a clear signal of an imminent hike in interest rates.
