Emerging Markets Cheat Sheet (October 3, 2011)
Strengths
- In China, industrial companies’ profit rose 28.2 percent in the first eight months from a year ago. Net income climbed to 3.2 trillion yuan ($500 billion), the National Bureau of Statistics of China said this week.
- Korea has sufficient foreign-exchange reserves to cope with a potential financial crisis even if European investors take their money out of the country, central bank Governor Kim Choong Soo said.
- Indonesia has foreign reserves of $120 billion, while foreign debt funding is about $30 billion, according to CLSA research. The reserves should provide Indonesia enough liquidity in the event that foreigners withdraw their money as a result of an escalation of the European sovereign debt crisis.
- China’s hog herds are “firmly bouncing back,” with the total number of pigs rising for six months and the number of breeding sows rising for four months, according to the Ministry of Agriculture in Beijing. The pork price increase was the largest contributor to rising inflation in China. Also this week, China Premier Wen Jiabao said China food prices are stabilizing.
- Korea’s industrial production rose 4.8 percent in August from a year ago after rising 4 percent the previous month, but it declined 1.9 percent sequentially month-over-month.
- Exports in India have been steadily growing and are on course to reach the government’s target of $300 billion for the current fiscal year, driven by increased government support to exporters to tap into new markets in Latin America and Africa.
- Turkey is three times more efficient in using energy than China, Russia, or South Africa, according to Credit Suisse. Also, Central European countries (the Czech Republic, Hungary and Poland) made the most incremental improvement over the last decade.
- Turkstat reported that the Turkish economy added 2.2 million new jobs in the first eight months of this year.
Weaknesses
- Korea’s consumer confidence index fell to a five-month low of 99 in August, down from July’s reading of 102.
- Investors are worried about China’s shadow-banking loans, due to intensified news that many small- and medium-sized enterprise (SME) debtors are bankrupt, and therefore bank shares are under pressure. A China International Capital Corporation Limited (CICC) bank analyst estimated private lending went up 38 percent to RMB 3.8 trillion in total loans outstanding in the first half this year, and he further estimates that non-public loan (NPL) increases from small enterprises would reach RMB150 billion, 0.46 percent of corporate loans, not as bad as many media reported.
- Economic growth in South Africa slowed significantly in the second quarter of 2011, to 1.3 percent from 4.5 percent in the first quarter. This can be largely attributed to the ongoing sovereign debt crisis in Europe and an overall negative global economic outlook. Currently, unemployment is just above 25 percent of the labor force.
Opportunities
- Merrill Lynch expects record 2010 construction permits in Turkey to translate into a significant increase in demand for kitchen appliances. Typically, construction permits lead house deliveries and white goods sales by 12 to 18 months.
- As railway investments decline, China’s next bright spot in fixed asset investment is water conservancy investment. The Chinese government is said to invest Rmb 4 trillion in the next five years in water and environment infrastructures. This chart shows the water conservancy investment has increased in recent years after being neglected for the last 10 years, after frequent droughts, floods and food shortages in recent years. In the twelfth five-year plan, water infrastructure investment is expected to be at a cumulative average growth rate (CAGR) of 23 percent, according to CLSA China strategist Andy Rothman.
- According to The Beijing Axis, the global balance of power is shifting into the hands of rapidly industrializing emerging growth giants, especially Brazil, Russia, India, China and South Africa. Today, these countries are fuelling the global recovery with their huge demand requirements, high growth multiples and vast deployment of capital. The report also highlighted that these emerging powers are becoming more present in securing a foothold in Africa’s vast and rich resources.
- Bloomberg reported that Bovespa, the operator of Latin America’s largest securities exchange, is planning to start a bond trading platform by the middle of next year. Marcelo Maziero, Bovespa’s head of product and customer development said, “We are developing a platform. We are accelerating the fixed-income side, so it gets to the same level as stocks.”
Threats
- In China, SMEs are very much underdogs when it comes to bank lending; therefore, they borrow from shadow banks, i.e., private loans and entrusted loans, to expand their growth. With the economy slowing down and loan price going up (see chart shown below), many of them are leveraged at a wrong time. Many SMEs are now financially stressed.
- The La Nina storm is threatening record South American crops. Rabobank International reported that La Nina runs the risk of bringing dry weather to parts of South America, threatening record crop production on the continent. Analysts have speculated that because weather forecasts indicate that La Nina conditions are expected to strengthen, this would likely have a negative impact on corn planted area and yields. Corn production is expected to rise 12 percent this year and soybean output may gain 1 percent.
- Colombia’s policymakers will probably leave borrowing costs unchanged for a second straight month and end a dollar-purchase program as slowing inflation allows them to gauge the impact of the European debt crisis on global growth, Bloomberg reported. Currency “intervention isn’t needed at these levels,” head analyst at Banco de Bogota SA Camilo Perez said, “What is the general driver in markets now is risk aversion and that means a weaker peso.” We continue to see emerging markets leaving their rates unchanged in response to global economic uncertainty.
