Emerging Markets Diary (December 20, 2010)

Emerging Markets Diary (December 20, 2010)

Strengths

• Thanks to temporary employment of census workers and a continued increase in manufacturing jobs, South Korea’s jobless rate unexpectedly declined to a six-month low of 3.2 percent in November.
• China’s credit rating was raised by Standard & Poor’s to AA- from A+. S&P says the country’s $2.65 trillion foreign exchange reserves added to its financial strength. Hong Kong was upgraded to AAA from AA+.
• China plans to increase total trade with India to $100 billion by 2015, representing 10 percent annual growth from this year’s estimated total of $62 billion.
• Mexico’s auto exports increased by 51 percent from January to November. Most of these are going to the U.S.
• November industrial output in Russia accelerated 6.7 percent year-over-year. This exceeded market expectations and boosted metals and mining equity performance.

Weaknesses

• China’s Consumer Price Index (CPI) rose 5.1 percent from a year earlier in November. Driven by higher food prices and residential expenses, this is the fastest pace in 28 months.
• Moody’s downgraded Vietnam’s credit rating to B1 from Ba3 with a negative outlook. They cited the risk of a balance payments crisis and eroding foreign currency reserve.
• Singapore’s non-oil domestic exports grew by a lower-than-expected 10 percent in November on a year-over-year basis. This is the slowest pace in a year, due to fewer shipments of electronics and pharmaceutical products.
• The Central Bank of Turkey approached the problem of its rising current account deficit with an unorthodox policy mix: Cutting short-term interest rates while simultaneously raising reserve requirements for the banks. The change will remove close to 5.5 billion lira in liquidity from the system.

Opportunities

• Fleury, a Brazilian health care play, has agreed to purchase Labs D’Or for $1 billion reales. Labs D’Or is a provider of clinical and imaging analysis in the Rio de Janeiro region, where it operates in 57 locations.
• Codelco President Diego Hernandez estimates that copper demand will grow by 4-5 percent in 2011, with supplies rising by just 3 percent. A deficit of 500,000 tons is likely next year, with an average price of copper between $3.80-4.00 per pound.
• Chile’s pension fund assets under management at the end of November reached $141 billion, up 21 percent year-over-year. The funds, which are estimated to own 8.6 percent of Santiago Stock Exchange listings, are an important stabilizing factor in the country’s capital markets.
• Russia, the first country to offer direct trading of the yuan outside of China, plans to extend its hours of trading. Increased exports spur demand for the currency, as China overtook Germany to become Russia’s largest trading partner. Russian importers of Chinese manufactured goods and Chinese importers of Russian timber, seafood and coking coal will save as much as 5 percent in transaction costs by dealing in local currency rather than in dollars, according to the Russian Central Bank.

Threats

• According to some press reports, the price of tortillas in Mexico is to rise from 8.5 pesos per kilogram to 12 pesos per kilogram due to higher corn and fuel prices. Should this take place, we would expect an outbreak of discontent as tortillas are an important part of the diet in Mexico.
• Third-quarter economic growth in Central Europe was fueled in large part by replenishing inventories after the 2009 recession. Rising inventories accounted for more than a quarter of Poland’s expanding gross domestic product. Slovenia and Slovakia were the main drivers for the Czech Republic’s growth. Continued gains will depend on exports, while consumer spending is likely to suffer as governments cut budgets to plug their deficits.