Emerging Markets Cheat Sheet (May 16, 2011)
Strengths
- In spite of political uncertainty in Peru, Credicorp reported solid first quarter results with net income rising 40 percent year-over-year, well ahead of consensus estimates. However, the bank cautioned that its future performance will be linked to economic stability in the country that, in a large measure, will depend on the outcome of the forthcoming election on June 5.
- Mexican-listed airport groups have reported satisfactory traffic data for April: ASUR led with a 4.8 percent increase, while GAP/OMA registered a 1 percent rise in the number of passengers.
- The 2009 combined middle and affluent (MA) class population of Emerging Europe was equal that of China. Russia has the second largest MA emerging market population, and Poland’s rivals that of India. At $17,856, Turkey has the second highest MA class GDP per capita in emerging markets.
- Taiwan’s April exports rose 24.6 percent, driven by information and communication products, minerals, and machineries.
- National Bureau of Statistics of China shows real estate investments reached RMB 1.3 trillion for the first four months of this year, up 34.3 percent from the same period last year. New project starts were up 24.4 percent year-over-year; sales were up 13.3 percent to RMB 1.4 trillion.
- Korean central bank freezes benchmark interest rate at 3 percent, after inflation in April declines to 4.2 percent from 4.7 percent in March, indicating a direction that inflation might start to peak. Also, Indonesia froze its benchmark rate at 6.75 percent in the week after its inflation was stabilizing at around 6.5 percent. If this is a trend, emerging Asia countries might be successful at curbing inflation.
- China International Capital Corp (CICC) says China’s Internet revenue will grow to RMB 1.5 trillion by 2013, which equates to a compound annual growth rate of 40 percent and 6.5 percent of total retail in the country. Sina, in its first quarter earning release, said its Weibo membership has grown to 140 million registered users, adding 40 million since February. CICC also believes the growth in Internet users will drive Internet infrastructure investment. It is estimated that China has 450 million active internet users, the largest in the world.
- In April, China has achieved its targeted money growth rate of 15 percent, i.e., M2 money supply is at 15.2 percent. If maintained, China might be able to manage a soft landing for its high flying GDP growth.
- China’s macroeconomic numbers also show robust consumer spending with retail sales growing 17.1 percent in April.
- Investment momentum remains high in China. Urban fixed-asset investment growth surprised the market on the upside by strengthening to 25.4 percent.
- China’s April exports grew 29.9 percent, which is a desirable growth given the RMB appreciation pressure and cost increases for Chinese manufacturers.
- Power generation in China was up 11.7 percent in April, but it still faces power shortage across the country.
Weaknesses
Since 2004, public sector wages grew faster than wages in the private sector in Poland. Higher wages, combined with better social benefits and stable employment, lead many Poles to cast a wary eye toward privatization plans. Powerful unions were recently able to block initial public offering (IPO) plans.- China’s consumer price index was 5.3 percent in April, slightly lower than 5.4 percent in March. Although the number is still above the government’s desired target of 5 percent for the year, a key component of the index, food, has declined 0.4 percent from March, indicating the government measures on price control have worked.
- Industrial production growth in China slowed to 13.4 percent year-over-year in April, compared to 14.8 percent in March, caused by government tightening of the housing market and inflation control.
- Auto sales in April fell 0.25 percent year-over-year in China, indicating a spillover effect from the government’s tightening on the housing market.
- China has just increased the reserve replacement ratio (RRR) another 50 basis points, reaching 21 percent for the large banks. Considering the fact that deposit growth year-to-date in China was 17 percent, the impact on the banks’ loan book is minimal.
- Chinese high speed rails are having a negative impact on airline traffic, particularly in the mid-to-short distance travel. According to the China Ministry of Railways, it takes four hours by high speed train from Wuhan to Guangzhou, while it takes three hours by airplane, including time spent traveling to the airport or train station and check-in.
Opportunities
- The number of listed airlines in Latin America increased this week with a successful IPO of Avianca from Colombia – the stock gained 18 percent on the first day of trading.
- There are indications that Mexico and Panama might be considering joining a combined equities platform (MILA) that will also include Chile, Colombia and Peru.
- Falabella, the Chilean retailer, has received a license to start banking services in Colombia.
- According to Metal Bulletin, Russian producers are looking for a $10 to 20 per ton increase in hot rolled coil export prices in June, which could signal some improvement in demand on the export markets. This could help maintain stable prices on the domestic market, while any signs of recovery in construction demand in Russia would be quite supportive for Russian steel companies.
Deutsch Bank China Economist Ma Jun recently boosted his forecast of RMB deposits in Hong Kong to 2 trillion by the end of 2012, driven by rapidly rising trade settlement between China mainland and Hong Kong. RMB deposits soared to 407 billion in February 2011, six times the amount in the same period last year. Among the many opportunities arising from this growth is that Macau casino business will be the low hanging fruit for investors since it benefits directly from the RMB out-flows. The chart shows the correlation between RMB deposit in Hong Kong and Macau gaming revenue.
Threats
- A recent correction in commodities prices may be a headwind for resource dependent countries in Latin America, notably Brazil, Chile and Peru.
- A company press release by Magyar Telekom announced that the regulator in Hungary has obliged the operator to provide access to its passive network infrastructures, including ducts, poles, dark fiber, copper and optical local loops. It remains to be seen who will take advantage of this regulation to take share away from Magyar.
- April’s macro economic numbers show that the growth of the Chinese economy is slowing due to China’s monetary tightening. The market believes China will have one more interest rate hike in second quarter, and several RRR increases until inflation concerns subside. While the market is broadly predicting a soft landing in China, investors have yet to commit their money in the market, as shown by Hong Kong lower daily trading volume.
