Emerging Markets Cheat Sheet (January 31, 2011)
Strengths
- Taiwanâs industrial production rose a stronger-than-expected 18.2 percent year- over-year in December and 4.3 percent month-over-month from November, driven by machineries, electronic parts and base metals. Consumer confidence rose to a 10-year high of 86.8 in January from 83.2 in December due to closer ties with China, a solid labor market recovery and asset price reflation.
- In a recent research trip to China, our analyst observed that all the airplane seats were sold. Most of the travelers in China were migrant workers and college students who couldnât afford air travel 10 years ago. As incomes increase, the people in China are upgrading their consumption.
- Also in his China trip, our analyst witnessed seemingly countless construction projects breaking ground in Chongqing, a southwest municipality of 30 million people.
Weaknesses
- According to a quarterly Nielsen survey, 79 percent of Asian consumers cut spending to save on household expenses in the fourth quarter of 2010, compared with 65 percent of North Americans and 62 percent of Europeans. Higher prices for food and fuel may have contributed to the rise of frugality.
- Indiaâs central bank raised its benchmark interest rate for a seventh time since March 2010 by 25 basis points to 5.5 percent and raised its inflation forecast to 7 percent from 5.5 percent by March 31, citing a widespread increase in food prices. India has been the worst-performing Asian market so far this year.
- Thailandâs industrial production dropped 2.5 percent year-over-year in December, the first decline in 14 months and worse than the market expectation of a 0.7 percent gain, reflecting weaker exports for the same month due to a higher base in 2009.
Opportunities
- At the UBS Greater China Conference, an NRDC official said Chinaâs planned urbanization rate for the next five years is to rise from the current 40 percent to 60 percent. That means China expects 600 million more people to live in cities. Experts estimate that demand for base materials, such as cements and steel, will increase at an average annual growth rate of 7 percent until 70 percent of the population moves into cities. Urbanization will also bring about demands for urban transportation, plumbing, interior design and other consumption of urban lifestyles.
- The China Ministry of Railway estimated recently that railway passenger turnover will increase 13 percent a year until 2015. High speed trains have changed lifestyles in China. They shorten distance and make the population much more mobile. China now has 8,300 kilometers (about 4,960 miles) of high speed rail, and plans to build another 4,700 kilometers (2,814 miles) by 2013.
Threats
Although Shanghai and Chongqingâs property tax programs have been widely expected in China, their implementation, announced only one day after the central government released eight harsher policy guidelines to combat property speculation, was much sooner than investors had anticipated. A higher frequency of anti-speculation policy measures and tighter coordination between central and local governments may increase the risk of over-intervention and lead to an imminent decline of property transactions and even a price correction like what happened in 2008. Pending a property market shakeout, investors may stay away from higher-end property developers with lower asset turnovers and higher leverage.
