Emerging Markets Cheat Sheet (June 13, 2011)

Emerging Markets Cheat Sheet (June 13, 2011)

Strengths

• The China Banking Regulatory Commission (CBRC) has announced guidelines to support lending to small enterprises with loan sizes of less than five million yuan.
• Taiwan has allowed tourists from mainland China to travel freely with daily permits capped at 500 people.
• Ecorodovias toll road traffic in Brazil grew by 17 percent in the first five months of this year. The shares of the company have outperformed the broad index by 16 percent year-to-date due to its defensive nature.
• Mexico’s consumer price index in May declined by 0.74 percent month-over-month bringing the annual inflation to 3.25 percent. Lower electricity rates have been one of the main contributors.
• Russian wheat exports are set to resume with the lifting of the export ban imposed after a severe drought last summer.

Weaknesses

• China might reduce toll fees on highways and bridges to reduce transportation costs, affecting toll road revenues.
• Export growth slowed noticeably to 19.4 percent year-over-year in May (compared to. 29.9 percent year-over-year in April), below market consensus of 20.4 percent. Import growth rebounded strongly to 28.4 percent (vs. 21.8 percent year-over-year in April).
• The Bank of Korea raised its policy rate by 25 basis points to 3.25 percent, which may depress housing prices and increase the debt burden for leveraged Korean consumers. For the health of the Korean economy, the rate increase is necessary to dampen inflation expectations.
• Appreciating RMB is flowing to Hong Kong’s housing market and causing sharp price increases, particularly for high-end properties. Inflation expectations are also driving Hong Kong residents to favor property purchases.
• The China Banking Regulatory Committee is looking to increase risk weightings for bank loans. This move potentially increases bank’s capital costs.
• Following flat auto sales, China saw total sales down 4 percent year-over-year in May at 1.38 million units. Passenger vehicles and commercial vehicles were down 0.11 percent and 14 percent year-over-year, respectively.
• Investment banks are cutting China’s 2011 estimated GDP growth rate.
• A shocking irregularity in credit activities at La Polar, a low-cost retailer in Chile, may necessitate an impairment charge of nearly $400 million for the company with non-performing loans at 40 percent of portfolio vs. 9 percent in the sector. The stock lost nearly 45 percent this week on the news.
• May’s Emerging Europe purchasing managers indices (PMI) confirm that the region’s manufacturing industry is losing the tailwind provided by the global economic recovery. The slackening comes amid monetary and fiscal tightening in China and Europe.

Opportunities

• Chinese demand for thermal coal is a long term phenomena due to its increasing power consumption. China has just removed its import coal tariff to allow more coal to sell in China market. This is positive for coal from Indonesia and a reflection on tight domestic coal supply. Recently, the market speculated China may put a price control on the spot coal price, which is still not expected to change the positive demand-supply for the coal miners.
• Has the sell-off in the Peruvian market on the news of Ollanta Humala becoming President been overdone? We remain optimistic that the new government will not derail pro-market policies of Peru, the fastest growing Latin economy, and a major commodities producer. After a plunge in the aftermath of the election result, the Peruvian bourse has recouped most of the losses as market participants are reassessing a new political landscape. Cencosud, a Chilean retailer with 10 percent of sales in Peru, announced it will move ahead with a $220 million expansion plan in that country.
• The news that sugar production this year in Brazil will be less than expected has been supportive of the price for this commodity, up 20 percent in June.
• During next week’s St. Petersburg Forum, China and Russia could sign a contract for 68 billion cubic meters per year starting in 2015, but the price may or may not be agreed upon. VTB Capital believes the formula for the price will be close to that for Europe, which is linked to the oil price with a six to nine month lag.

Threats

• Although we don’t believe there is a high probability of a hard landing in China, there are risks that could lead to slower GDP growth. These risks include a chronic power shortage, auto sales deceleration, weak PMI, property market corrections and monetary tightening.
• There are indications that Brazilian regulators may not authorize on competitive grounds a merger of Perdigao and Sadia that created Brasil Foods (the largest global poultry exporter) two years ago. A final vote is expected on June 15.
• A 63 percent devaluation of Belarus currency since March 31, will have a negative impact on the earnings of telecom companies operating in the country.