Emerging Markets Diary (November 22, 2010)

Emerging Markets Diary (November 22, 2010)

Strengths

• Hong Kong’s unemployment rate remained at a 20-month low of 4.2 percent in October, as total employment rose for a fifth straight month to a three-year high, exceeding the level before the Lehman crisis.
• Taiwan’s GDP expanded by a faster than expected 9.8 percent year-over-year in the third quarter, thanks to stronger than estimated private consumption and investment.
• Chile’s GDP in the third quarter grew 7 percent, the fastest growth in six years with internal demand (private consumption and fixed investment) being the main contributors.
• Peru’s GDP in September grew by 10.4 percent, above the consensus estimate of 9 percent. Construction, up 23 percent, followed by manufacturing, up 17 percent, and the financial sector, up 17 percent, were the main drivers of growth. Peru’s economy is expected to grow by 8.6 percent for the full year, the fastest in Latin America.
• Despite headline risk, Mexico’s tourism industry is coping quite well. During nine months this year ending September, the number of tourists to the country reached 16.6 million, up 6.9 percent year-over-year, bringing revenue of $9 billion, up 7.7 percent year-over-year.
• While higher sugar prices (up nearly 90 percent in the last six months) can be a headwind for consumers, they benefit producers – Sao Martinho of Brazil reported third quarter results that beat estimates by nearly 80 percent.
• The results of OTP of Hungary for third quarter were much better than expected (net income of HUF30.9 bln vs. HUF22 bln median estimate) due to lower provisions and a low effective tax rate (just 4 percent). Special banking tax was included in these results shaving off HUF14.7 bln from net income on an after tax basis.
• Economic activity in Turkey bounced back aggressively, with first half 2010 GDP up 11 percent year-over-year, well ahead of any other country in Emerging Europe. Credit growth is up by 25 percent year-over-year, showing both willingness of the private sector to borrow and the ability of Turkish banks to lend. Similarly, the labor market in Turkey has shown good improvement, with unemployment (now at 10.6 percent) 2.6 percent lower than a year ago.

Weaknesses

• Singapore’s total retail sales increased by a less than expected 0.3 percent year- over-year in September and declined by a seasonally adjusted 2.4 percent from August, as car sales continued to be affected by government quotas to control pollution and congestion and stronger Singapore dollar encouraged residents to spend abroad and discouraged tourist spending domestically.
• China raised the required reserve ratio for banks again by 50 basis points effective November 29, a second hike in two weeks, bringing the ratio to 18 percent for large banks and 16 percent for smaller ones. This is an effort to drain excess liquidity in the system induced by foreign inflows and manage inflation expectations.
• Hong Kong introduced additional measures to rein in property speculation by imposing a 15 percent stamp duty on the notional amount, in addition to capital gains tax, of homes sold within six months and raising the down payment ratio to 50 percent from 40 percent for homes worth $1.5 million or more.
• Argentina’s inflation expectations (non-government) for this year rose to 30 percent from mid-20 percent, three months ago.
• The National Housing Commission in Mexico reported an 11 percent rise in inventory of housing units at the end of September with most units below the MXP 250,000 threshold (low income).
• Polish inflation rose in October above the central bank 2.5 percent target of 2.8 percent, but the central bank seems reluctant to act for fear of zloty appreciation.

Opportunities

• Historically, it is the real interest rate, or nominal interest rate adjusted by inflation, that tends to negatively correlate with the equity market. China is not an exception. Despite its central bank raising interest rates lately, China’s real rate has been going increasingly negative, because so far the nominal rate has failed to catch up with inflation as policymakers have opted to remain accommodative amid external uncertainty and domestic restraint including property crackdown and energy conservation. This scenario is likely to continue, which should make equities more attractive to investors.

• There are indicators that Mr. Guido Mantega, the Finance Minister under outgoing President Lula of Brazil, will remain in his post in the new government of Ms. Dilma Rousseff. Will it mean continuation of a loose fiscal policy?
• During an investor day at America Movil (AMX), the company provided guidance for revenue growth for 2009-14 (CAGR of 6-8 percent) and EBITDA growth (CAGR of 7-9 percent). AMX also expressed interest in paid-TV, which, with penetration of just 17 percent, offers sizeable growth opportunity in Latin America.
• Retail funding (traditionally a source of strength) has been a curse of Russian banking this year, according to J.P. Morgan. Amid falling inflation, growth in the retail deposits put pressure on net interest margins. With social spending ratcheting up into the end of the year, an opposite trend is likely to unfold.

Threats

• CPI expectations in Brazil are rising with higher food prices. The data from November showed a rise of 1.16 percent vs. median estimate of 1.06 percent, the highest level since December 08.
• Rzeczpospolita reported that Poland might follow Hungary, moving from the private fully-funded system to the public pay-as-you-go pension system, to facilitate deficit reduction by 1.7 percent of GDP. This would be a threat to Polish equities, trading at a premium to other emerging markets due to a local pension funds’ participation.
• 2011 is likely to be difficult for Russian electric utilities due to political pressure on the segment, according to J.P. Morgan. It is a pre-election year, which is likely to result in the regulators paying more attention to tariff growth.