Emerging Markets Diary (December 6, 2010)
Strengths
- Both the official and private version of China's Purchasing Managers' Index surprised on the upside in November, with the former accelerating to 55.2 from 54.7 in October, and the latter jumping to 55.3 from 54.8. The improvement represents the strongest reading in seven and eight months for the two measures, respectively, as industrial activity in China regained momentum.
- Hong Kong's retail sales surged 21.6 percent in October from a year earlier, the biggest jump in eight months and well ahead of market expectations, as lower unemployment and easy monetary conditions encouraged local household and business spending, with tourists from mainland China also contributing to better consumption.
- Indonesia's credit rating has been placed on review by Moody's Investors Service for a possible upgrade, as recent improvement in the country's foreign currency reserve and continuous reduction in government debt have lowered the country's risk profile and encouraged greater inflows of foreign direct investment and long-term capital.
- Macau's casino gaming revenue rose 42 percent year-over-year in November and 57 percent in the first 11 months of 2010, thanks to tourists surging in from mainland China.
- Chile's unemployment rate in November fell to 7.6 percent. The Ministry of Labor stated that 315,000 formal jobs have been created this year with 96 percent of them on a contract basis.
- After years of discussions, Brazil's senate has approved a bill to create a centralized credit bureau that will facilitate operations in the banking system and help deepen credit penetration in the country.
- Pepsico agreed to buy a controlling stake in Russian dairy and juice company Wimm-Bill-Dann at a 33 percent premium to its share price prior to the announcement. The acquisition values all of Wimm-Bill-Dann at $5.4 billion, or 30 times earnings, and validates higher growth inherent in the Russian consumer market.
Weaknesses
- South Korea's industrial production grew by a slower-than-expected 13.5 percent year-over-year in October and shrank 4.2 percent month-over-month from September, as semiconductor and automobile makers reduced production in anticipation of weakening global demand for the rest of the year. Manufacturers' confidence for December declined to an 11-month low of 91 from 92 for November, due to a rising won and higher raw material costs.
- Thailand's central bank unexpectedly raised its benchmark interest rate for a third time this year by 25 basis points to 2 percent, in an effort to normalize interest rates and forestall inflation pressure going forward.
- The recent decision by the Hungarian government to divert approximately 30 billion forint of contributions per month from the private pension funds to the state has created a drag on equities, as they will be sold off over time. The pension association has announced that it will appeal to the Constitutional Court and the European Court of Human Rights.
Opportunities
- China has set an aggressive 2011 construction target of 10 million subsidized, affordable housing units for local governments, 72 percent higher than this year's 5.8 million units, with an emphasis on public rentals for lower income families. This new development should help cushion a slowdown of new home starts in the private sector, and should underpin further demand for not only construction materials such as steel and cement, but also consumer durables like home appliances.
- America Movil appears to be considering a move beyond Latin America, its traditional stronghold, as the company is one of the bidders for a 51 percent stake in Telekom Serbja. Deutsche Telekom and France Telecom are also interested in this asset.
- Peru's Finance Ministry has unveiled an infrastructure budget for 2011-2013. The country will spend $24 billion on improving transport, housing and transport facilities. At the same time, tax collection in the country has increased by 21 percent year-over-year spurred by a rise in consumption.
- There are early indications that a Mexican airline will restart operations in the next few weeks, which would be positive for sentiment for the airport group.
- The Turkish Consumer Price Index (CPI) moderated to 7.7 percent year-over-year, lower than the consensus forecast of 8.2 percent. While food price swings keep CPI inflation volatile, core inflation remains in a downward trend. This favorable development seems very supportive for the Central Bank of Turkey's stated intent to keep rates on hold at 7.0 percent until the fourth quarter of next year, and even then to raise rates only moderately.
Russia has won the right to host the World Cup. Looking at some recent country winners' stock market performance after similar announcements, South Africa outperformed the emerging markets sector by 11.1 percent and 17.7 percent for the subsequent 3-month and 6-month periods, respectively, while Brazil outperformed by 10.4 percent and 18.9 percent, respectively. Historically, according to Merrill Lynch, sector beneficiaries include airlines, airport operators, food and beverage distributors, tourist operators and destination points, hotels and lodges, restaurants and bars, security firms, sports and convenience food retailers, car rental groups, advertising agencies, TV and media providers, and mobile and telecommunication groups.
Threats
- China's National Development & Reform Commission has decided to freeze 2011 contract prices for thermal coal, used to fire power plants, at the same level as this year. This comes as a negative surprise to domestic Chinese coal producers with significant revenue exposure to contract coal sales.
- Brazil's Central Bank has increased reserve requirements on demand deposits from 8 percent to 12 percent and on time deposits from 15 percent to 20 percent. The estimates are that the move will reduce liquidity in the banking system by 61 billion real.
- A realistic look at the path of the Polish debt/GDP ratio, according to Morgan Stanley, suggests that there is no other way for the Polish authorities to avoid a breach of the 55 percent threshold than to either approve substantial fiscal tightening or to make changes to the pension system in Poland that are similar to, albeit less radical than, Hungary's system.
