Emerging Markets Cheat Sheet (August 8, 2011)

Emerging Markets Cheat Sheet (August 8, 2011)

Strengths

• South Korea’s exports in July rose to a record high $51.4 billion, representing 27.3 percent year-over-year growth, much stronger than market consensus 17.1 percent and faster than June’s 13.6 percent, thanks to robust shipments of vessels, steel, petrochemicals and auto parts.
• Indonesia’s consumer confidence accelerated to 111.8 in July from 109 in June, led by encouraging stock market performance, moderating inflation and buoyant economic growth. GDP growth remained solid at 6.5 percent year-over-year in the second quarter, unchanged from the first quarter, due to sustained momentum in consumer spending and government expenditure.
• Malaysia’s June export growth registered higher than expected, up 8.6 percent from a year earlier, driven by gradual recovery of global supply chain disruptions in the wake of Japan’s March earthquake and rising Asian demand for commodities.
• The Bloomberg chart below shows that benchmark equity indexes have retreated this year in developing nations including Brazil and China where a majority of people are satisfied with their country’s direction, while stocks advanced in Russia and Indonesia, where most respondents said they were dissatisfied. The divergence between share prices and happiness shows investors are concerned that the fastest-expanding economies have overheated, making them vulnerable to a drop in growth as central banks raise interest rates, according to Renaissance Asset Managers. While economic growth in Indonesia is slower than in China and India, inflation in Indonesia fell for six straight months through July and the central bank lifted borrowing costs only once this year. Russia’s central bank raised its refinancing rate twice in 2011 as the economy expanded at less than half the pace of China.

• Copa, a Panama-based airline serving Central and South America, reported solid second-quarter results thanks to a higher load factor (up 3.2 percent to 76.3 percent) and increased capacity that included opening of four new destinations. In addition, its operating margin improved to 17.6 percent from 14.4 percent, despite a 38 percent rise in fuel cost. The company revised upwards guidance for the remainder of the year.
• ASUR reported a 5.9 percent increase in airport traffic in July driven by domestic and international travelers, up 8.5 percent and 3.6 percent year-over-year, respectively.
• Bancolombia’s second-quarter results came in with net income up 32 percent year-over-year.

Weaknesses

• China’s official manufacturing Purchasing Managers Index (PMI), dominated by state owned companies, continued to slow to a 28-month low of 50.7 in July from 50.9 in June, presaging a slowdown in industrial activity. The earlier-released HSBC flash PMI, comprising mostly smaller enterprises, suggested even weaker conditions in the private sector.
• The Indian Prime Minister’s Economic Advisory Council revised its GDP forecast downward to 8.2 percent from 9 percent for the current fiscal year. India’s central bank raised the benchmark interest rate by 50 basis points to 7 percent in the previous week.
• Hong Kong’s number of housing transactions declined 60 percent year-over-year in July with the value of transactions down 39 percent, the lowest since April 2009, caused by rising mortgage rates and higher down payments required by its government to curb speculative purchases.
• The Hungarian stock exchange lost the most during the week, as exports slumped in June and industrial-output growth fell to its lowest level since December 2009.
• Itau Unibanco reported second-quarter results that came in around 2 percent below estimates, mainly due to lower treasury gains. Most Brazilian banks have been under pressure this year due to purported overleverage by retail consumers.
• Brazil’s Industrial Production in June declined 1.6 percent year-over-year mainly due to weakness in the textile and footwear segments. In order to alleviate pressure on the industry, which has been affected by appreciation of the Brazilian currency, the government is considering tax breaks for the next two years.

Opportunities

• According to the 2011 Blue Book of World Luxury Association, China’s total domestic luxury retail sales had reached $10.7 billion by the end of March, or 27.5 percent of world’s total. China has become the second-largest luxury consumer globally after Japan and is estimated to surpass Japan by 2012 as luxury demand migrates to tier 2 and tier 3 cities. Growing awareness of premium brands and attention to quality of life among aspiring Chinese consumers should benefit local jewelers and department stores.

• Russian inflation slowed in July as prices for fresh fruits and vegetables dropped by 9.2 percent from the previous month, easing margin pressure for food retailers. Food price inflation may slow further in the second half thanks to a favorable harvest and stabilizing food prices globally.
• Liverpool, the Mexican department chain, will enter the local equity index effective September 1, which should generate increased interest among investors for the Mexican consumer theme.
• At a time of increased volatility in the markets, it may well be that traditional utilities will provide refuge for investors. In Brazil, the worst-performing emerging market year to date (down 25 percent), most electric utilities are in the positive territory. They include AES Tiete (up 2 percent), CPFL (up 7 percent) and CEMIG (up 13 percent), mainly thanks to healthy dividend yields in the sector that ranges from 7-10 percent.

Threats

• Unilateral intervention by the Japanese government in its currency market caused the Japanese yen to weaken against the U.S. dollar significantly on Thursday. A weaker Japanese yen would make Korean exporters less competitive compared with Japanese exporters. Considering the fact that Korea has been a major beneficiary in the wake of the Japanese earthquake in March, investors may have started to take profits in exporters in Korea in anticipation of a potential comeback of Japanese activity.

• Turkey’s Central Bank unexpectedly cut key policy rate by 50 basis points, to “reduce the risk of a domestic recession that may be caused by the heightened problems in the global economy.” It came as a surprise to economists who expected a rate hike to cool off domestic demand.
• A protracted disruption in the equity markets worldwide, partly a result of lower economic growth, will cloud sentiment for most emerging markets, particularly those tied to commodities.