Emerging Markets Cheat Sheet (February 14, 2011)

Emerging Markets Cheat Sheet (February 14, 2011)

Strengths

• China produced 340 tons of gold last year, an 8 percent increase over the previous year. All of it was consumed domestically, in addition to the largest imports ever last year.
• Indonesia’s GDP grew 6.9 percent in the last quarter of 2010, largely driven by both commodity exports and consumer spending.
• China has announced subsidies to wheat growers and raised the minimum rice sales price for growers. These measures are intended to encourage more crop production.
• Asia consumer spending is robust as the regional economies are growing faster and incomes increase. Tourist arrivals to Singapore rose 20 percent, to 11.6 million people, which has boosted tourism-related businesses in the country. Also, the Hong Kong government is planning to build a huge shopping center close to the Shenzhen border for the mainland shoppers who have become the main driver for booming Hong Kong retail growth, particularly for luxury goods.
• Vanke, the largest residential developer in China, saw its January sales rise more than 200 percent year-over-year. Other major developers also more than doubled their sales. However, we will have to wait for a few months to see if the government’s recent tightening policy will dampen the sector’s activities.
• Positive momentum continues for the Mexican auto industry; in January, car and light truck production increased by 21 percent while sales in the domestic market rose by 7.3 percent and exports grew 45 percent year-over-year.
• The Chilean airline, LAN, reported a 13.3 percent increase in passenger traffic in January with cargo volume growing by 12 percent.
• ASUR, the Mexican airport group, reported an unchanged number of passengers passing through its airports in January as compared to last January.

Weaknesses

• Thirty-six more cities are curbing second home purchases in China.
• People’s Bank of China raised the one-year lending and one-year deposit rates by 0.25 percent to 6.06 percent and 3 percent respectively, effective February 9, 2011. This is the third interest rate increase by the Central Bank since last October. However, the demand deposit rate was only raised by 0.04 percent, which helps net interest margin for the banks. The five-year deposit rate increased 0.45 percent, which encourages the depositors to keep their money in the bank to reduce housing market speculation. After the rate increase, consumers still face about a 2 percent negative interest rate if they keep their money in the banks.

• It is said that the People’s Bank of China will raise the required reserve rate for local commercial banks since they have been extremely active in making loans.
• Russian metals companies ChelPipe, OAO Koks, and Nord Gold NV called off plans to sell shares this month amid weak investor demand.

Opportunities

• China’s government is reportedly starting rural road construction and will spend 30 billion RMB this year. In China, there are more than 600 million people living in rural counties, and they usually don’t have well-paved roads, sewage, garbage collection or flush bathrooms. There are vast amounts of home improvements and transportation construction to make for years to come.
• China’s National Development and Reform Commission has targeted the country’s auto production capacity at 31.24 million units in the next 5 years, compared with auto sales of 18 million for 2010. Auto production will drive metals and other chemical production, such as palladium and plastics.
• The sharp fall in Chinese aluminum production, from about 17.5 million to 14.5 million tons on an annualized basis, has changed the balance of supply and demand in the country. The country could even be forced to turn to the international market for supplies, driving prices higher. Alcoa has predicted that Chinese demand will outstrip production by 700,000 tons this year even as the rest of the world has a surplus aluminum output.

Threats

• China wheat crops are at risk due to drought in wheat-growing Northern provinces. However, this could drive up global crop prices and further add to inflation pressure in the country.
• Generally, the market is in consensus that China has moved into a rising interest rate cycle, and the People’s Bank of China will further raise rates and RRR in the first half of this year. Inflation expectations have moved up after the central bank raised interest rates on February 8. However, the Chinese Premier Wen Jiabao said during the Chinese New Year holiday that his government’s priority this year is to keep inflation from rising. He is confident that that goal will be achieved.
• Heavy demand for electric power in Chile, brought about by hot temperatures and a surging economy, may necessitate power rationing in the country unless conditions improve. To alleviate the problem in the short term, water levels in reservoirs will need to increase and distributors will implement voltage reduction of 5 to 10 percent.
• Peru raised interest rates by 0.25 percent to 3.50 percent due to a pick up in inflation that reached 2.2 percent in January, the highest level in 27 months. This is the second interest rate hike in Peru this year.
• While inflation is turning up in most countries, the picture seems less worrying in emerging Europe than elsewhere in the emerging markets. While inflation in Turkey has typically been higher than average, it has slowed sharply in recent months, to just 49 percent in January. Russia appears to have a more serious problem, with inflation having risen in a straight line from under 6 percent in mid-2010 to 9.6 percent in January.