Emerging Markets Cheat Sheet (September 6, 2011)
Strengths
- China’s official PMI for August was 50.9 percent, up 0.2 percent from 50.7 percent reading in July after declining since April this year. This clearly demonstrates that China is firmly in a soft landing trend engineered by the government.
- Korea’s exports went up 27.1 percent in August. Korean heavy industry exports continue to lead the growth with vessels export growing 77.5 percent year-over-year.
- Macau’s casino revenue went up 57 percent in August on a year-over-year basis. The casino companies have all reported beating sales and earnings estimates for the first half of the year.
- China revised individual income tax policy came into effect on September 1. Workers with lower than Rmb3500 monthly wages will no longer pay any income tax.
- Russian crude oil output growth accelerated 2.1 percent year-over-year to 10.28 million barrels per day in August, based on the data published by Interfax. Russia maintained its position as the world’s leading producer of oil.
Weaknesses
- Within China’s August PMI number, there are worrisome numbers: the new order index was flat versus that of July at 51.1 percent and the new export order index continued to drop in the last five months reaching 48.3 percent, down 2.1 percent from July. A reading below 50 percent indicates economic activity is in contraction mode. This will have an adverse impact to the revenue and earnings of transportation, materials, and industrial companies.
- Also in the August PMI number, the input purchasing index, a sub-index, showed an increase of 0.9 percent, to 57.2 percent. This shows inflation pressure is still in the market. The price indices for food and beverage, and non-ferrous products are above 60 percent, which makes it questionable for the central bank to loosen monetary tightening.
- Korea reported that August inflation rose to 5.3 percent, a three-year high. The market already sees corporate cost increases in Korea as in all Asian countries. The Korean government is turning to a hawkish stand on inflation control now.
- Korea industrial production grew 3.8 percent in July, the lowest pace in 10 months. As a leading export country, Korea itself is an indicator that global demand is weak.
- The People’s Bank of China has announced through the government-owned newspaper The China Daily that it will broaden the reserve requirement ratio (RRR) base to include margin deposits for bank acceptance and guarantees. In effect, this is equivalent to a 2.4 percent RRR increase. It is sucking money out of circulation and lending, but it serves the central bank better in controlling liquidity at less cost, and provides the bank more leverage at open market operations, while it is negative to the commercial banks in their loans growth and funding cost. It will also further withdraw liquidity from the market unless the central bank issues fewer notes going forward to make up the liquidity withdrawal.
- UBS cut GDP forecasts for Hungary to 2.0 percent and 1.5 percent for 2011 and 2012, respectively, from 2.2 percent and 3.3 percent. The Hungarian economy is the weakest in Emerging Europe as it continues to suffer under a debt burden (exacerbated by Swiss franc strength) that chokes off domestic demand.
Opportunities
- China’s equity markets are at a depressed level. The MSCI China Index is down 10 percent year-to-date. Its valuation is close to the low of 2008, with the price-to-book ratio at 1.6x, as indicated in the chart below. For that reason, it is widely believed the share prices of China-based companies have good support at the current level.
- Ukraine is poised to overtake Brazil as the third largest corn exporter after the U.S. and Argentina, shipping abroad 9.25 million metric tons of the grain this season. The revenues from this record export will be boosted further by corn prices rising as U.S. crop conditions fell to the lowest level since 2005.
- Morgan Stanley’s economics team expects the current account deficit in Turkey to improve as early as this month. The foreign trade numbers along with the expected rise in tourism revenues suggest a noticeable decline in upcoming current account numbers.
Threats
- China Premier Wen Jiabao this week published an article in which he said three things that the markets were focused on: first, the declining Chinese economic growth, thus the economic activity slowdown, is what is intended by the government; secondly, inflation control is still the priority for the government; lastly, China will not change the policy direction for now. Effectively, his statement dampened the market expectation for an easing stand on monetary policy. There has not been encouraging economic statistics and policies from China to drive the market. Brokers may come to the reality to reduce their corporate earning forecasts, adding more pressure to the market.
- While not entirely immune from the sovereign debt crisis contagion afflicting Western Europe, countries in Emerging Europe stack up relatively well on net debt-to-GDP ratios. This week, Fitch affirmed its BBB sovereign rating for Russia on an “exceptionally strong” balance sheet and kept its “positive” outlook on the debt.
