Emerging Markets Cheat Sheet (February 22, 2011)

Emerging Markets Cheat Sheet (February 22, 2011)

Strengths

• China auto imports shot up 93 percent in 2010 to 813,600 worth $30.64 billion, and were mostly German and Japanese luxury cars, while China auto exports were up 40 percent to a record of $51.8 billion.
• The number of Chinese internet users is estimated to be 457 million as of 2010, up 19 percent from 2009.
• China State Construction Engineering Corp, the largest construction company in China, will build the $1 billion casino resort, Baha Mar Resort, in Nassau, Bahamas, financed by the Export-Import Bank of China.
• Wang Lixin, the China representative for the World Gold Council, said China’s gold investment demand will grow 40 to 50 percent this year.
• China’s oil drilling equipment sector is expected to grow by more than 20 percent year-over-year due to high oil prices, according to the China Petroleum and Petrochemical Equipment Industry Association.
• China’s January money supply (M2) eased to its slowest pace in six months at 17.2 percent year-on-year. It was 26.1 percent for the same period last year, indicating that the government has been successful in containing rapid money supply growth. Also, January new loan volume of 1.11 trillion RMB was lower than market expectations of 1.2 trillion. January new loans are generally higher than other months in the year.
• Peru’s GDP grew by 8.9 percent in December with a full year 2010 growth of 8.8 percent, making the country the fastest growing in Latin America. Peru’s market was the region’s best performer last year, up 65 percent.
• Brazil’s Congress approved the government’s proposal to raise the minimum wage to R545, which was accompanied by a fiscal austerity measure that will reduce government spending by R650 million.
• Ford Motor Co. agreed to form a joint venture to assemble and distribute vehicles in Russia with Russian automaker OAO Sollers.

Weaknesses

• China’s January inflation rose to 4.9 percent, lower than the market expectation of 5.4 percent, after the People’s Bank of China raised the one-year lending rate by 25 basis points last week to 6.06 percent. This is higher than the government target inflation rate of 4 percent in 2011, and higher than the 2010 target of 3 percent. To contain inflation, the government is expected to take further monetary and administrative measures, including raising bank required reserve rates and interest rates, and implementing price controls. While price controls can remove the pricing power of suppliers, inflation will squeeze corporate profit margins, which the market has yet to fully price in.
• Starting February 24, China will raise the bank required reserve rate to 19.5 percent from 19 percent for major banks.
• Hungarian wages fell 4.6 percent in December from a year earlier, the biggest decline in almost two years. Public wages dropped 10.3 percent, while private company salaries were down 2.2 percent.

Opportunities

• According to Deutsche Bank research, the MSCI China Index’s current 5-year rolling average return is 98 percent, much lower than the median 5-year rolling return of 155 percent. The current 5-year rolling average ranks at the bottom 20 percentile of all 5-year rolling returns from 2006 to date. This probably indicates upside potential for China’s equity market. Its performance was recently ranked in the top half among Asian peers. Last year it was consistently ranked as the worst performer.

• UBS research shows that the spread between the producer price index (PPI) and the consumer price index (CPI) in Russia has recently widened, which has positive implications for corporate earning power. In Russia, PPI is largely a reflection of rising commodity prices, which is beneficial for the economy dominated by commodity exporters.
• Gazprom, which has a monopoly on Russian exports of natural gas, is under pressure to grant independent producers access to its pipeline network, according to newspaper Vedomosti.

• America Movil (AMX) will decide in the next few weeks if it will bid on the Polish mobile operator, Polkomtel. Opinions are divided about the strategic rationale of such a move that would see AMX going beyond the traditional comfort zone of Latin America, particularly in the saturated Polish market, which has a 120 percent mobile penetration.
• Colombian airline Avianca will likely enter the equity market in the second quarter, widening investment opportunities in the country.
• Lojas Renner will open three pilot project stores of a smaller format (250-300 square meters) than the traditional ones.
• Grana y Montero, an infrastructure company in Peru, is guiding for a 6 percent revenue growth in 2011.

Threats

• China’s Central Bank is expected to consistently fight inflation and reverse its monetary policy to an average level of around 17 percent M2 growth.
• Drought in the Shandong Province may affect about 30 percent of the wheat harvest in that province and may cause crop prices to rise in China. However, China still has plenty of grain reserves.
• Chile’s Central Bank raised interest rates by 25 basis points to 3.50 percent due to inflationary pressure (CPI of 2.7 percent in January), close to the target of 3 percent.
• Russian Prime Minister Vladimir Putin criticized the fact that electricity tariff growth for 2011 exceeds the planned 15 percent in many regions, Interfax reported. "The decision has been made—15 percent and no more, and I ask that this is stuck to," Putin was quoted as saying.