Emerging Markets Cheat Sheet (May 2, 2011)

Emerging Markets Cheat Sheet (May 2, 2011)

Strengths

• The World Bank finds that China is no longer dependent on trade surplus for growth. The finding shows China’s plan of structural economic change to facilitate domestic consumption is well underway. China’s trade surplus is already shrinking to about 3 percent of its GDP. The World Bank predicts it will be at 2.7 percent of GDP for this year and next, and accounts for just 0.2 percent of GDP growth. In the first quarter, China has opened its pocket to buy more goods from the international market. In particular, it will continue to need more base materials and energy to feed domestic consumption growth.
• China’s inflation pressure from food and vegetables in April may have decreased after the wholesale food price index declined almost 10 percent a week ago, and reports indicated that vegetable supply is abundant.
• The Yuan (Rmb) has broken through a meaningful psychological level of 6.5 Rmb per U.S. Dollar (USD) this week at 6.4921/USD, and it was rumored last week that the Rmb exchange rate might take a one-off adjustment upward. A higher Rmb exchange rate makes Chinese consumers richer when it comes to imported goods and touring outside of China.
• The Brazilian telecom regulator is likely to propose a 10 percent cut in Mobile Termination Rates around mid-year – a smaller reduction than had been feared by the markets. This should further support VIVO, which has been a major outperformer on the Brazilian Bolsa this year.
• Consumer credit in Brazil grew by 1 percent month-over-month and 20 percent year-over-year in March. We expect a slowdown in the credit activity after the central bank embarked on a tightening cycle this year. The current ratio of loans to GDP of 46 percent is still low by international standards and will offer opportunities for the banking sector in years to come.
• In March, retail sales in Chile grew by 15 percent year-over-year with industrial production rising 31 percent year-over-year.
• The Istanbul Stock Index in Turkey has risen more than 20 percent in dollar terms since the end of February, as investors saw initial signs that the unorthodox policy of the central bank began slowing loan growth.

Weaknesses

• China’s census has shown a trend of a rapidly aging population in the country, which, if left unchanged, will cause a labor shortage in a decade and social burdens for the young to support seniors. People over 60 now account for 13.3 percent, exactly 3 percent above 2000 levels. Young people under 14 make up only 16.6 percent of the population, down from 23 percent 10 years ago. China’s fertility rate fell below 1.5, which is extremely low.
• Korea’s industrial production was up 8.8 percent in March, falling short of the expected 11 percent. Korea’s March inflation was 4.7 percent, after showing 4.5 percent in February. Korea’s economy typically is highly correlated with global growth and China.
• The political uncertainty in Peru is creating wild swings in the local equity market, and is expected to continue until the second round of presidential elections on June 5.
• Poland’s economy minister continued to block an IPO of JSW, a coking coal producer, until management reaches an agreement on wages with the union. JSW was set to file a prospectus by April 20.

Opportunities

• Driven by ongoing urbanization and investment in broadband infrastructure, China’s mass market consumers are increasingly using the internet for entertainment, e-commerce, and mobile applications. The chart below by McKinsey shows the vast potential for internet operators to monetize the opportunity. China’s internet operators are in a land-grab period to monetize internet consumption. This also drives the business of entertainment makers and broadband equipment providers.

• This week the presidents of Chile, Colombia, Peru and Mexico signed a Pacific Agreement with a view to integrate the four economies. The agreement will facilitate trade, services and movement of people, and is aimed at creating a stronger platform to compete with vibrant Asian economies. The four economies will have 200 million people and will account for a third of Latin America’s GDP.
• The central bank of Russia raised its refinancing rate by 25 basis points to 8.25 percent, setting the stage for further ruble appreciation. A stronger ruble is expected to rein in a rise in inflation and will boost consumer purchasing power.

Threats

• In Hong Kong and China, investors are speculating that the People’s Bank of China will raise interest rates over the long weekend of May 1 as it habitually does over weekends or holidays. Since most investors believe this could be the last or second-to-last rate increase, the market may react positively next week at the open.
• An influx of global funds seeking short-term returns, or hot money, into China moderates the impact of monetary tightening and increases inflationary pressure. The CEBM Group estimated the total amount of hot money influx was Rmb 930 billion in the first quarter, marginally above the historical high of Rmb 921.9 billion reached in the first quarter of 2008. This quarter’s hot money could offset the impact of 150 basis points of the required reserve ratio hike.

• The fortunes of the Mexican home builders, which are among the weakest performers this year on the Mexican Stock Exchange, are unlikely to change with a proposed IPO of Javer, based in Monterrey. The company will be the fifth-largest home builder on the market, which saw housing starts fall by 12.5 percent in the first quarter due to a slowdown in financing from the government agencies.