Emerging Markets Cheat Sheet (March 28, 2011)
Strengths
- As of March 2011, 41 constituent companies of the MSCI China Index (28 percent of the market cap) have reported their 2010 results, according to UBS Investment Research. In aggregate, earnings grew 29 percent year-over-year, 8 percent higher than consensus.
- Recently announced capital expenditure budgets from PetroChina and CNOOC support continued confidence in the oilfield services sector. PetroChina, the largest oil and gas company in China, will allocate $28 billion to exploration and production in 2011, while CNOOC is expected to spend $8.8 billion.
- Thermal coal and natural gas were highlighted again following the Japanese nuclear crisis because they are considered safer materials. China uses about 1.6 billion tons of thermal coals a year in power generation, the largest in the world. Coal prices have increased in the first quarter in China by more than 5 percent on the average.
- Stock prices of Korean automakers and auto parts suppliers increased in the last week. The market expects Korea to sell more cars after Japanese auto parts productions were temporarily disrupted by the earthquake, reducing the number of cars produced globally.
- Also in the last week, stocks of building materials, construction equipment, and construction engineering companies have gone up with expectation that China policy housing, development of West China, and inland river ports will increase demand for their products and services. In addition, the market also expects that Japan will be able to reconstruct its earthquake-shaken facilities and roads, benefiting lower- to mid-end construction materials and equipment from China.
- The Chinese government said they will make 94 percent of highways toll free, reducing logistical costs for consumer and industrial goods. Currently almost all highways collect tolls so China will need to either build more roads or cancel toll operators on current highways.
- The HSBC China Manufacturing PMI Index rose 0.8 point in March to 52.5. A reading above 50 indicates expansion. At the same time, output prices fell to a seven-month low, suggesting inflation pressures have eased.
Weaknesses
- In the week, the People’s Bank of China (PBOC) has withdrawn a net of 103 billion RMB by issuing short-term bills through an open market operation. Considering the recent 50 basis points reserve ratio requirement increase becomes effective today, the central bank will freeze an additional 360 billion RMB. It looks like the quantitative tightening will continue for a while before the inflation is completely under control. After new loans creation is constrained this year, the largest money supply is from the central bank’s purchase of foreign inflow from trade surplus. The discount rate on three-month government bills has been stable at 2.79 percent for the last three weeks, which may indicate that the PBOC will not raise interest rates this month.
- In South Korea, the consumer confidence index fell to 98 in March from 105 in February. A number below 100 indicates pessimists outnumber optimists. This is primarily caused by higher oil prices and the prospects of a possible short-term export disruption to Japan due to recent earthquake and nuclear crisis.
- Taiwan’s February industrial production increased 13.3 percent, the missing market consensus of 16.3 percent, though still at a high growth mode. The lower than expected number is mostly due to the seasonal slowdown during the Chinese New Year.
Opportunities
China’s twelfth Five-Year Plan includes the development of West China, as well as making better use of its inland waterway system by building hydropower plants, irrigation systems and transportation ports. As we have reported in a previous Investor Alert, China will build 36 million units of public housing. Together, we expect those projects will demand a vast amount of construction materials and services, and should be a catalyst for construction related stocks. The chart shows the recent trend of stock prices of construction-related Hong Kong H-share companies.- In China’s petrochemical industry, there are only three major oil companies controlling the market. CNOOC has the mandate to develop offshore oil and investment outside China. PetroChina is mostly a monopoly for domestic oil production and exploration, in addition to downstream refineries. China Petroleum and Chemical is the largest downstream refiner and the maker of petrochemical products. Traditionally, these big three are so integrated that they do their own oilfield services. Today, as China’s demand for crude grows, other domestic oilfield services companies are starting to emerge. These newcomers will have great opportunities in servicing natural gas and oil wells for the major companies, especially when capital expenditures in exploration and production (E&P) are increasing in China.
Threats
- Hong Kong has been the place for mainland China’s shoppers to buy luxury goods and houses. By the end of last year, Hong Kong statistics showed that about 30 percent of the houses were actually sold to the mainland consumers. That trend may start to change. Phoenix TV reported that such shoppers have recently dropped by 50 percent. The speculation is that China’s monetary tightening policy initiated since last April has now taken a toll on the consumption power in China.
