Emerging Markets Cheat Sheet (March 7, 2011)

Emerging Markets Cheat Sheet (March 7, 2011)

Strengths

• In his webcast with Chinese citizens, China Premier Wen Jianbao said China will build 35 million units of public housing in the next five years. In 2009, China built six million units of commercial houses, the highest number in the last 10 years. Wen also said China will raise the income tax threshold for salary earners and that China’s GDP target for this year is 7 percent, lower than the 8 percent target for the last 10 years. However, China typically beats its targets. Local governments in particular have ambitious GDP targets, ranging from 10 percent to 20 percent. Economists see the lower national GDP target as a healthy indication that China is now focusing on GDP quality rather than quantity.
• This week China opened its annual “two meetings” conference, Lianghui, where the Chinese People’s Political Consultative Committee and the National People’s Congress convene. Since these two parliaments are discussing policies to grow China’s economy and particularly the twelfth Five-Year Plan (2011-2015), the stock markets in mainland China and Hong Kong usually respond favorably. Sector that will be favored by the government policies should see an additional lift.
• Also in Lianghui, some attendees proposed that China reduce its import tariff on cosmetics and luxury goods in order to narrow trade surplus and encourage domestic spending. Bank experts in China have said that a large part of China’s excessive money supply is due to huge purchases of foreign exchange inflows caused by a trade surplus.
• Taiwan has eased the rules for mainland Chinese investors investing in technology sectors. Mainland investors will be allowed to hold a maximum 10 percent share, but still this is a breakthrough for the two sides after the Economic Cooperation Framework Agreement signed last summer. Since the warm-up of the relationship and the signing of various trade agreements, many Taiwanese stocks have gone up because their sources of revenue have expanded.
• Casino revenue in Macau rose 48 percent in February as visitors from mainland China increased.
• The minister of China’s National Development and Reform Commission said the rise in China’s CPI in February is likely to be lower than that in January. Brokerage firms have lowered their February CPI forecast from 5 percent or above to around 4.5 percent.
• The chart below shows the China CPI since January 1990.
• Car sales in Brazil in February rose 11.1 percent month-over-month and 23 percent year-over-year. We expect the momentum to slow down after the Central Bank raised the interest rates by 50 basis points to 11.75 percent this week
• Motor vehicle sales (passenger cars and light commercial vehicles) in Turkey were at an all time high for February, increasing 88 percent compared to last year.
• Russian inflation slowed in February for the first time in seven months as the ruble strengthened, curbing the cost of exports.

Weaknesses

• China PMI dropped 0.7 percent to 52.2 percent from 52.9 percent in January. Although the number still indicates healthy economic activities, this is third month of continuous decline. The drop is partly due to a week-long holiday for Chinese New Year in February. Many investors believe the March number will be up.
• China’s new bank loans for February were 600 billion RMB, compared with 1.04 trillion RMB in January. This deccrease shows the government’s monetary tightening has been effective.
• Mexican airport operator ASUR’s traffic in February declined by 1.5 percent year-over-year.
• OTP bank, Hungary’s largest lender, said fourth-quarter profit declined 15 percent after the country introduced a banking tax last year.

Opportunities

• Lianghui is expected to come up with many policies that favor consumer spending and industrialization. Industry sectors that are related to the two themes are likely to see investors follow their stocks.
• Hong Kong and China A share markets have already reacted to positive news and policies out of the Lianghui conference. Although news can be a short-term driver, the conference policies will have profound long-term revenue and earnings impact on selective sectors.
• The chart below shows the A share price multiple premium over H shares in Hong Kong. Historically, A shares are more expensive that H shares, but in the recent past, A shares have been cheaper than H shares. The graph indicates that trend has returned. Among other things, a re-rated A share market could benefit investment banking, brokerages, and insurance stocks as revenues increase.
• The Chile-Turkey free trade agreement came into effect this week, which should provide additional opportunities for exporters of each country.
• The Colombian Minister of Housing laid out a plan to build one million new homes in the next four years, 65 percent will be devoted to low-income families with the remainder split between middle and upper-income families.
• Concha y Toro of Chile acquired the Fetzer Vinyards in California (7th largest wine maker in the U.S.) for $238 million, its largest acquisition and its first in the U.S.
• Russia plans to build a $7.4 billion rail complex in Moscow by 2016. It is projected to be the largest railway hub in Europe, connecting to all of Moscow’s four airports.

Threats

• Oil price hikes and inflation may increase material costs and further squeeze gross margins for industrial and consumer goods producers, though China has capped power and coal prices.
• Fewer loans and higher borrowing costs due to government monetary tightening could reduce corporate investment and consumer spending and slow growth. We don’t see a liquidity issue due to excessive money available in the market.
• The Brazilian government announced a 14 percent reduction in the low income housing budget.
• Record worldwide food prices may remain high because the output response needed to ease supply concerns may take years, the International Monetary Fund said.