Emerging Markets Cheat Sheet (July 11, 2011)
Strengths
- China will release economic statistics on the ninth of each month to avoid the information leaks that have occurred previously.
- China’s June passenger car sales rose 6.2 percent year-over-year, better than the flat sales in May. There has been speculation that the Chinese government may provide some policy support to help the auto sector.
- Chinese vice premier Wang Qishan said the government will encourage banks to lend to mid-sized and small private companies after government investigators showed severe liquidity issues for those companies in Zhejiang and Jiangsu provinces.
- Korea’s economy is unlikely to contract in the third quarter, but will likely grow at a faster pace in the second half than the first half of the year, according to Finance Minister Bahk Jae Wan.
- Some Chinese insurers spent almost 3 billion yuan buying yuan-denominated shares in Industrial and Commercial Bank of China and Bank of China in the second quarter, indicating that Chinese bank stocks are at low valuations.
- Japanese core machinery orders rose 3 percent month-over-month in May, as orders for construction-related machinery rose 41.5 percent following the March 11 earthquake and tsunami.
- Brazilians continue to borrow despite the highest real rates in the world (around 6 percent). Lending in May grew by 20.4 percent year-over-year with mortgages leading the way (up 50 percent). Mortgages, at just 4 percent of GDP, represent a great potential for further growth with Itau Unibanco being one of the main players in the sector.
- Latin airlines are posting strong traffic data despite high oil prices. Copa, based in Panama, reported a 29 percent increase in passenger traffic in June, while Avianca, based in Colombia, posted a 20 percent increase in the first half of the year.
- The Czech stock market is defensive in nature as it is dominated by telecom and utility stocks. In addition, Czech banks are in healthy shape and, even if the eurozone’s debt problems escalate, the impact on the Czech banking system should be limited. And, the Czech Republic is one of very few emerging markets where foreign direct investment (FDI) inflows are much stronger than portfolio flows. Robust FDI inflows are a manifestation of the structural sturdiness of the Czech economy.
Weaknesses
- PBOC’s latest interest rate increase of 25 basis points indicates that the government is protecting the bank’s profitability. The central bank applied an increase of 25 basis points to all durations of deposit and lending rates, but left the demand deposit rate unchanged at 0.5 percent. Nearly half of Chinese deposits are in demand deposit accounts. This rate increase can increase banks’ net interest margin by 5 to 10 percent.
Last week, China’s Audit Commission concluded a detailed local government debt audit. The audit has revealed total local government debts to be Rmb 10.7 trillion. About half of the debts belong to local government financing vehicles, and half are guaranteed debts. Some are betting on a credit crisis.
- Walmex same store sales for June rose by 0.6 percent year-over-year versus expectations of a 1.5 percent rise. A high base effect from last year’s World Cup negatively affected comparisons.
- Implied equity volatility is much higher in Russia than for the emerging markets at large. BCA Research argues that the relative volatility spread is too wide and will narrow going forward. Russia’s financial system was cleansed and economic excesses worked out in 2008 and 2009. In contrast, credit froth and excesses have been building up in other emerging economies.
Opportunities
- The Russian government is discussing a boost to 2012-2014 planned budget spending, which should be positive for consumer stocks. Spending growth is expected to accelerate from 8.9 percent in 2011 to over 10 percent a year in 2012-2013, as the government plans to spend an additional $35 billion per year in 2012-2014 versus previous plans. That yearly spending increase is substantial; it is roughly equivalent to 2 percent of GDP.
Threats
- This Saturday’s China economic statistics may see a decline in the economic growth rate.
- Inflation in Brazil in June came in at 6.71 percent, above the Central Bank upper corridor limit of 6.5 percent, igniting fears that tightening of more than 25 basis points this year may be in the offing.
- Hungary and Croatia continued to sidestep official comment regarding the handing over of MOL Chairman Zsolt Hernadi on charges of bribery. Croatian legal experts say MOL may lose INA board control should the bribery allegation be substantiated.
