Emerging Markets Cheat Sheet (April 4, 2011)
Strengths
- As the Shanghai copper price improves, the Shanghai/LME spread is coming out of negative territory.
- Bank Indonesia has been using a strengthening rupiah as a tool to ease inflationary pressures versus rate hikes. The all-important food prices (35 percent of CPI) have stabilized and began trending downward as weather issues have normalized, according to CLSA. The Jakarta Stock market has responded positively to the government policy and improving inflation, which rose to 6.65 percent in March, better than February’s number by 0.32 percent. It may be an indication that Asian countries will be able to control inflation in the region. This may also provide a clue that a rising Chinese yuan (RMB) can help deter increasing energy and material costs.
- Casino revenue in Macau rose 48 percent in March.
- Ping An Insurance may “slightly” lift equities in its portfolio as it turns more optimistic on Chinese stocks, the company’s president said.
- China’s manufacturing growth accelerated for the first time in four months as the PMI rose to 53.4 in March from 52.2 in February. (Note: Manufacturing activities are in expansion when PMI is above 50.)
- Korea’s exports jumped 30 percent year-over-year in February, while imports advanced 28 percent, showing global demand for Korean industrial goods.
- Chile’s Falabella proposed a P60 dividend and stock buyback program, which has been welcomed by market participants.
Weaknesses
- Shanghai officials announced Monday that the price increase for newly-built homes in 2011 should be smaller than the increase in the city's annual economic growth (target 8 percent) or the local residents' incomes, the financial website Caijing.com.cn reported. We believe an 8 percent yearly price appreciation is still attractive, given inflation is at about 5 percent and there is a negative real interest rate of about 2 percent.
- As a part of its 12th Five-Year Plan, China plans to limit the number of automobiles in large cities with populations of more than 10 million people, the Economic Observer reports. In a country whose policy is aimed at growing its economy, we think this only reflects the need to improve China’s urban infrastructure, including roads and traffic system, and to develop clean energy.
- Hong Kong’s February retail sales missed expectations. Sales value rose 8.6 percent year-over-year to HK$29.2 billion, while sales volume grew 5.1 percent. The increase can be explained by the Chinese New Year for which purchases are usually front loaded. Nevertheless, Hong Kong saw tourists grow 2 percent in February, and 70 percent of those came from Mainland China.
- Rumor has it that the People’s Bank of China (PBOC) may increase both interest rates and the bank required reserve ratio (RRR) by April 10 and April 20, respectively. We are of the opinion that an interest rate hike and RRR increase are more concentrated in the first half of the year, but sporadic in the second half depending on monthly inflation expectations. While many in the market have believed China may delay a rate rise because of the Japanese earthquake, we think the PBOC policy is domestically oriented rather than being influenced by outside factors.
- Korean inflation rose 4.7 percent year-over-year in February, the highest in 29 months as oil and food prices increased.
Opportunities
- China may face a shortfall of 56 million tons of coking coal this year, the China Securities Journal reported on Tuesday, pushing Chinese steel mills to look further afield to make up the supply gap. China is expected to produce 513 million tons of coking coal, used in steel production, in 2011, but total consumption is expected to reach 569 million tons, the paper said.
- In the their earnings announcement in the last two weeks, Chinese banks have seen a sector trend of increasing NIM (Net interest margin) in a rising interest rate environment in China. Despite the PBOC tightening liquidity, those banks can still grow their new loans at about 13 percent for 2011.
Threats
- Disruption of Japanese auto parts manufacturing and chemical production caused by earthquake and power shortage are still a threat to many car manufacturers. However, it may be a good time for Build Your Dreams (BYD) dealers to sell off their inventories.
- PBOC potential tightening in April may increase market volatility in the short term, but it is already expected by the market consensus as an eventuality.
- President Cristina Kirchner of Argentina has agreed to a 24 percent wage hike by the truck union workers raising inflation expectations in the country before the country’s October election.
- The surge of Ollanta Humala, a left-wing candidate, to the first place in the Presidential race in Peru came as a surprise before the first round of voting takes place on April 10. Mr. Humala is reported to have the support of 21.2 percent of the electorate, followed by Keiko Fujimori at 20.7 percent and Alejandro Toledo at 20.1 percent.
