Emerging Markets Cheat Sheet (August 2, 2011)

Emerging Markets Cheat Sheet (August 2, 2011)

Strengths

• As part of fiscal stimulus in a generally tightening monetary environment, the China Ministry of Finance said in a statement on Thursday it will allocate more funds to the nation’s construction of water projects. Apparently, those projects will drive up demand for engineering and base materials.
• Korea’s industrial production increased 6.4 percent year-over-year in June, lower than the consensus forecast of 7 percent. However, the absolute production level is 152, pointing to the second highest on record, which makes us continue to be bullish on Korean car makers and high-end industrial and chemical producers.
• HTC, a Taiwan Android smart phone maker, said it expected revenue from China to quadruple in the second half of this year. This shows robust demand for high-end smart phones in China and the sector is expected to continue to do well. We are optimistic for the future of this Taiwan smart phone maker, along with parts suppliers to smart phone makers such as Apple.
• Brazilians continue to show a penchant for talking on their mobile phones. In June, there were 2.3 million net additions bringing the total to 217 million users, or a 112 percent penetration rate in the country. Telecoms have been among the top performers this year in Brazil with TIM up 46 percent and VIVO gaining 30 percent year-to-date.
• Liverpool, the Mexican retailer, reported strong results for the second quarter with sales growing by 12.6 percent and EBITDA increasing 25 percent on lower costs.
• Despite headline risk, tourists are not abandoning Mexico—ASUR’s traffic (which includes the Cancun airport) in June grew by 2.9 percent.
• Strong drilling numbers in the first half of the year suggest that the oil companies are relatively confident that tax rebalancing will eventually happen.

Weaknesses

• The tragic Wenzhou high speed train crash last weekend triggered soul-searching among the Chinese people. Under attack from the media and the people for the accident and the high debt the train system has accumulated over the years, the Railway Ministry is said to be withdrawing some regional developments, which does not bode well for cement and railway equipment and devices. We have, for now, reduced or closed up exposures that are likely to be negatively impacted by decreases in railway spending.
• China Shipping Container Lines on Thursday said it would swing to a net loss for the first half of 2011 from a profit a year ago, with the international container market adversely affected by the debt crisis in Europe. The firm said the market was also hit by the earthquake in Japan. In Japan, the Big Three shippers all revised down their current year operating forecasts. As a leading indicator, a shipping slump may foretell a slow growth in the world economy.
• Taiwan’s second quarter GDP expanded 4.88 percent year-over-year, higher than the Bloomberg consensus estimate of 4.5 percent, however, it was a deceleration compared to the growth of 6.6 percent in the first quarter. Fixed investment was the major drag to the economy, while consumer spending is a solid support.
• The sugar cane harvest in Brazil, the world’s largest producer, was down 7.2 percent in the first half of July. Lower crops have been supportive of the sugar prices that are up 22 percent this year and adding to inflationary pressures.
• Chile’s industrial production in June expanded by 4 percent vs. 7 percent estimates year-over-year mainly due to a lower contribution from mining that declined by 5 percent.
• The Turkish Statistical Institute announced foreign trade figures for June 2011. In June 2011, exports increased by 19.3 percent, imports increased by 41.7 percent and the trade deficit increased by 79.2 percent, compared to the same month of 2010. Between January and June 2011, total trade deficit increased by 88.2 percent compared to the same period of 2010.
• In July, the Turkish central bank (CBT) maintained its year-end inflation forecast at 6.9 percent; above the 5.5 percent inflation target, but still within the two-percentage-point inflation band. According to the central bank’s latest inflation report, inflation is expected to stabilize around 5 percent in the medium term.

Opportunities

• Historically, the Chinese banks enjoy long-term stable growth as they are relatively less prone to cyclical ups and downs. This occurs for a number of reasons. In a slowing economy, they are providing more loans to stimulate; in a tightening market environment, they enjoy higher net interest margin (NIM) as they are protected by the government to sustain their profits; mainland banks are organically growing intermediary business, or non-interest incomes. However, the market this year had been concerned with the debt exposure these banks had lent to the economy. This bearishness priced Chinese banks at a price-to-earnings multiple that was reached only at the worst time of the global financial crisis at the beginning of 2009 as we had discussed in the prior week’s Investor Alert. The figure below by Deutsch Bank elaborates the debt situation in China vis-à-vis other countries of the world. The Chinese government debts are 32 percent of China’s GDP, which is lower compared with all industrial countries; and total debt in China is 159 percent of GDP, also lower than industrial countries.

• Mr. Ollanta Humala officially became the President of Peru on July 28, vowing to continue market-friendly policies and to deal with inequality issues in the country. There are more and more signs that investors are warming up to Mr. Humala—Lima’s stock exchange recouped earlier losses and although down 6 percent for the year, it is the best performing exchange in Latin America year-to-date.
• BCA Research analysts observe a supporting factor for Russian equities’ relative performance: Russia is among the few with improving profit margin trends relative to the emerging market average.

Threats

• The Wenzhou train crash exposed corruption in the Chinese government system, and it tarnished the reputation of the China-made high speed train system. The event will slow infrastructure investments in China, at least in railway system.
• While most discussion of the U.S. debt ceiling debate focused on the potential upward effects on the U.S. bond yield, the realization of a default (or downgrade) would entail downward revisions to GDP growth. Renaissance Capital estimates that a 1 percent decline in U.S. GDP growth lowers Russia’s GDP growth by 2 percent.
• A number of recent developments threaten to undermine the “reset” in relations between the U.S. and its allies. A U.S. administration banned Russian officials implicated in the death of an anti-corruption lawyer; U.S. intelligence agencies linked a Russian intelligence official to a series of bombings in Georgia, including one in September near the U.S. embassy; and Polish investigators rejected a Russian claim that the pilots of late President Lech Kaczynski’s plane were solely responsible for the deadly crash.