Emerging Markets Cheat Sheet (January 24, 2011)
Strengths
- China’s GDP expanded by a stronger-than-expected 9.8 percent in the fourth quarter compared to the same time last year. GDP growth gained speed from the 9.6 percent growth seen in the third quarter thanks to a recovery in external demand, domestic property construction, and early relaxation of energy saving measures. Gross domestic product grew 10.3 percent in 2010, accelerating from 9.2 percent in 2009 and 9.6 percent in 2008.
- Led by increasing employment and wages of migrant workers due to booming construction nationwide, China’s rural per capita income rose 10.9 percent last year. This was faster than urban income gains for the first time since 1997. China’s retail sales increased by a higher-than-expected 19.1 percent from a year earlier in December and grew 18.4 percent for the full year.
- Mobile subscription numbers from Brazil showed a 17 percent rise to 202 million users at the end of 2010. This brings the penetration rate for the country to 105 percent. We believe that rising ARPU (Average Revenue Per User) among the operators will now be a driving force in the industry.
- Strong demand from the U.S. helped Mexico’s auto parts production rise 45 percent to $60 billion in 2010.
- Despite well publicized violence in Mexico, the number of tourists to the country increased by 5.3 percent during 2010.
- Eastern European banks outperformed their Western European peers by 33 percent during 2010, according to Merrill Lynch. They run simpler, plain vanilla banking models, have no capital concerns, and have appealing long-term growth prospects. In addition, most have fiscally healthier sovereign balance sheets.
Weaknesses
- Driven by higher rents and food prices, Hong Kong’s Consumer Price Index (CPI) rose a higher-than-expected 3.1 percent (year-over-year) in December, its fastest pace in 23 months.
- The inflation cost of global hard and soft commodities pushed China’s Producer Price Index (PPI) up a higher-than-expected 5.9 percent (year-over-year) in December.
- The discount for Urals blend, a type of crude oil, relative to Brent Crude widened to more than $3 per barrel, leading to lower realized prices for Russian oil companies. The discount could widen further if a cut in the export duty, currently being mulled over by the government, brings more exports in the form of crude as opposed to fuel oil.
Opportunities
- China’s online advertising revenue may exceed newspaper advertising revenue by 2012. It’s expected to reach $6.95 billion in 2011, up from $3.87 billion in 2010, according to the Data Center of China Internet. Around 34.8 percent of the country’s population now has access to the internet, but online advertising only accounts for 11.2 percent of the market. A growing trend of advertising through online videos and social networking sites should benefit major Chinese Internet portals.
- The stock exchanges of Peru and Colombia are merging and will likely to lead to operational synergies between the two markets. This is a separate development from the integration of exchanges of Peru, Colombia and Chile, still expected to take place during the first or second quarter of this year.
- Compartamos, the micro lender from Mexico, is believed to be contemplating expansion to other Latin American countries.
- In conjunction with 7.2 percent (year-over-year) projected growth in 2011, Deutsche Bank forecasts 8.2 percent growth in Russia’s fixed asset investment.
Threats
- Recent hikes in both interest rates and required bank reserves in China have not been well communicated. This has added to investor apprehension and speculation on potentially more aggressive monetary tightening by Chinese policymakers. Lack of imminent relief in food inflation in January with snow storms in southern China, drought in northern China, and with Chinese New Year around the corner, the market may continue to be volatile in the near term.
- A threat of rising inflation caused Brazil’s Central Bank to raise interest rates by 50 basis points to 11.25 percent this week. While some industries, such as toll road operators, have inflation protection in their pricing mechanism, it remains to be seen how others will fare in a higher interest rate environment. It is expected that banks will start lowering guidance for credit growth this year.
- The Polish stock market’s two-year rally is probably nearing an end after the central bank raised interest rates for the first time since 2008. The chart from Bloomberg shows the benchmark WIG20 Index peaked six months after the central bank hiked rates in 1999 and 2007.
