Emerging Markets Cheat Sheet (April 11, 2011)
Strengths
- According to Xinhua News, the China National Offshore Oil Corporation (CNOOC) plans to launch another two to three offshore deep-water fleet teams in 2011-15. Its first deep-water offshore fleet team, with total investment of Rmb15 billion in 2006-10, is expected to be ready for operation in 2011.
- Sales of household appliances soared a massive 179 percent in China in March, benefiting from the government stimulus plan in the rural areas.
- China has raised gasoline and diesel oil by 500 RMB/ton and 400 RMB/ton, respectively. This will reduce margin pressure on Sinopec.
- China non-manufacturing PMI surged 16 points to 60.2 in March, showing stronger growth momentum for service sectors. This should be an early indication for sales and earning growth during the first quarter and first half of 2011 for consumer goods and services. We have already seen robust revenue and earnings growth last year reported by service sector companies.
- The index of economic activity in Chile in February rose 7.2 percent year-over-year, above the estimate of 6.3 percent
- Russian sales of new cars and light trucks jumped an annual 77 percent in March, beating forecast, as the government continued its so-called cash-for-clunkers program, the Association of European Businesses said. Half a million people have bought new cars built in Russia under the government’s rebate program, boosting sales by 30 percent last year to 1.91 million.
Weaknesses
- To further tighten liquidity, the PBOC raised its benchmark for the fourth time since the cycle started last year. Both one-year lending and deposit rates were hiked by 25 basis points to 6.31 percent and 3.25 percent, respectively. However, the demand deposit rate is up 10 basis points to 0.5 percent, after being left alone in the last rate hike in February. The overall effect on a bank’s net interest margin is neutral to local banks, but moderately positive to the Agricultural Bank of China (ABC), China Construction Bank, and Industry and Commerce Bank of China due to their better deposit franchises. Particularly, ABC should benefit more due to higher demand deposit and high loan rates in the rural areas in China.
- Televisa’s entry into the mobile market in Mexico through acquisition of a 50 percent stake in Iusacell for $1.6 billion received a negative reaction from the market, as the stock lost 10 percent in the last three days. There are differences of opinion among investors with respect to potential synergies between telecom and media companies
- Russian export flat steel prices have started to come off, according to Morgan Stanley. On the other hand, Russian steel market fundamentals remain strong driven by rising car sales, pipe and machinery production, and construction activity.
Opportunities
China’s offshore industry is in a 5-to-10-year growth cycle, according to Morgan Stanley. China has already become the largest shipbuilder in the world two years ago. It is rapidly growing by migrating up the value chain from low-end shipbuilding to high-end offshore industry. China’s offshore equipment and rig builders, such as China International Marine Containers, are able to enjoy a rapidly growing cycle because offshore capital expenditure is increasing exponentially by China’s exploration and production companies, such as CNOOC and PetroChina. China’s government is more than doubling offshore capital expenditures from RMB 100-120 billion in 2006-2010 to RMB 250-300 billion in 2011-2015. Offshore rig and equipment orders are mainly from domestic offshore oil explorers. The chart shows China’s offshore market share in 2010.- CEZ, the Czech utility, has proposed a 57 percent payout of last year’s profit, which will amount to CZK50/share, providing a dividend yield of around 6 percent.
- Lojas Renner of Brazil has agreed to purchase the houseware/bedding/bathroom store chain Camicado for $98 million. Through this acquisition, Lojas Renner will gain 27 stores in the country in the niche that is expected to grow as disposable income rises.
- There are indications that Santander is considering a listing of its Mexican subsidiary on the Mexican Stock Exchange. There is currently only one bank listed in Mexico, Banorte, and we believe that investors would welcome another financial services play onto the market.
- World Bank research suggests that the World Trade Organization (WTO) accession might increase Russia’s GDP by 3.3 percent and consumption by 7.8 percent in the medium term. Extraction of raw materials should benefit from lower trade restrictions, though this is likely to be partially offset by net losses in agriculture and light industry, according to J.P. Morgan.
Threats
While the PBOC rate hike can withdraw the excessive domestic liquidity from the market, and therefore curtail inflation, China has other potential sources of inflation. For one, it is better for China to minimize trade surplus since it is a major source of excessive liquidity when the PBOC buys foreign currency to maintain a stable but slow RMB appreciation. Secondly, increasing global commodity prices will evidently push up China’s consumer product prices. To manage a soft landing, China will continue to use all available tools to defeat inflation expectations. So far, it has achieved satisfactory results. For example, the CLSA China Soft Commodity Wholesale Price Monitor has shown a benign price increase year-to-date, and a flattish March price over February, which might be indicating that China’s inflation is peaking.- As the presidential election gets underway in Peru, investors await nervously the outcome after indications that a left-wing candidate, Ollanta Humala, is leading in the polls.
Oil prices above $100 a barrel are discouraging Russia from diversifying its economy, said Deputy Prime Minister Sergei Ivanov. He also said the current price was unsustainable and that Russia’s budget will fall into a deficit when it drops.
