Emerging Markets Cheat Sheet (May 9, 2011)
Strengths
- In April, a survey of 24 economists by Diyi Caijing, a financial journal, showed a consensus CPI of 5.2 percent, lower than the March number of 5.4 percent. The economists also predict that China’s trade surplus will be at $2.7 billion in April, versus $0.12 billion in March.
- Xinhua News reported Tan Rongyao, director of the State Electricity Regulatory Commission, as saying that China is able to make short-term increases in on-grid power prices as part of their efforts to reduce supply shortage. Since a drought southwest of China has hindered hydropower, increasing power production has to come from burning more coal, which is positive for coal price and demand.
- Ecorodovias, a Brazilian toll road operator, reported a healthy 11 percent increase in traffic during April underpinned by strong economy.
- Higher remittances to Mexico have been supporting the local retailers – Walmex reported a 7 percent increase in same store sales in April with total sales rising by 15.2 percent. Sales in Central America grew by 18.8 percent.
- Through the first three months of 2011, Turkey recorded a budget deficit of 4.1 billion lira, a noticeable improvement compared to an 11.3 billion lira deficit in the same period last year. Central government revenues are up 20.5 percent year-over-year, while non-interest expenditures increased 10.3 percent year-over-year. The primary balance posted a 9.8 billion lira surplus.
Weaknesses
- Brazil auto sales in April were down 5.5 percent month-over-month, following strong sales in the prior two months.
- Last year, the average profit margin of the Chinese steel makers was only 2.9 percent. This year, it can get worse in the face of increasing iron ore and coal prices without increasing steel prices.
- China’s industrial production continues to expand. In April, China’s official purchasing managers index was 52.9 percent, only 0.5 percent lower than March’s 53.9 percent. However, the new order index decreased 1.4 percent, showing some slowing down.
- Russian inflation pressures edged higher in April, rising 9.6 percent year-over-year, faster than the 9.5 percent year-over-year pace in March. Despite a gradual recovery in economic growth, government stimulus and extra spending from higher-than-expected oil revenues could keep inflation elevated throughout the remainder of 2011.
Opportunities
- According to Citigroup, corporate earnings based on the MSCI Asia ex Japan Index have exceeded a prior high, yet the market is not at a high, nor are valuations. We find the same discrepancy applies to HSCI Index. Therefore, we expect there is room for stock prices in Hong Kong and Asia region to improve. The chart to the right shows Asia’s equity price-to-earnings is at its historical average, despite their earnings at a historical high. Again, it shows the potential for multiples to expand.
- A weakness in commodities, including oil, has created an opportunity for airline stocks, some of which rallied this week. We have a constructive view of Copa with operations in Central America.
- Chilean retailers continue their Latin America diversification – Cencosud is expecting that Brazil will account for 20 percent of its sales this year.
Despite uncertainty associated with a presidential election in Peru, local companies are in the “business as usual” mode. Grana y Montero (infrastructure/construction play) won a sizeable mining contract in Chile that will take 45 months to complete. Intergroup reported a strong set of numbers during the first quarter of 2011 with a return on equity of 31 percent and earnings per share growing by 20 percent quarter-over-quarter.- According to Credit Suisse, a relaxation of bank lending standards leads credit growth by 12 months. The current trajectory of lending in Poland appears to be consistent with Credit Suisse’s projection of at least 10 percent private sector credit growth in 2011.
Threats
- In the last three weeks, the People’s Bank of China (PBOC) had a net Rmb 420 billion that matured. The market is worried that the PBOC might increase the bank’s required reserve ratio (RRR) another 50 basis points to withdraw that money. Also in the week, the PBOC governor said there is no limit for the RRR, indicating a further tightening of bank lending, if necessary.
- Domestic demand for gas has remained flat since 2007, but the sale of state giant Gazprom’s gas dropped by 19 billion cubic meters (bcm) on top of the same fall in Europe. Gazprom is coming under pressure from independent gas producers, which are on track to double their production to 116 bcm by 2015.
- The Supreme Court of Mexico backed the ruling of telecom regulator, Cofetel, regarding a 61 percent cut in interconnect rates imposed on America Movil (AMX). The decision has put pressure on the company, which in the past resorted to injunctions. The shares will likely remain volatile until it becomes apparent how the consumer will react and the net impact it may have on the finances of AMX.
