Emerging Markets Cheat Sheet (October 17, 2011)

Emerging Markets Cheat Sheet (October 17, 2011)

Strengths

• China’s Consumer Price Index (CPI) is stabilizing at 6.1 percent for the month of September, 0.10 percent lower than the 6.2 percent a month earlier. The highest level reached was in July, with CPI at 6.5 percent. Although September’s CPI was not low enough for the People’s Bank of China (PBOC) to loosen monetary tightening, it provides time for the government to increase food supply. China’s Producer Price Index (PPI) was 6.5 percent, lower than market estimate of 6.9 percent.
• Korea’s unemployment rate was 3.2 percent for September, while it was 3.1 percent for August. It is still very close to the 10-year low of 3 percent, showing the economy and businesses are currently stable in spite of a deteriorating external economic environment.
• China’s Central Huijin, a government entity that owns SOEs, started buying Chinese big-four banks, i.e., Industrial and Commercial Bank of China, Bank of China, China Construction Bank of China and Agricultural Bank of China in the A-share market. This shareholder buyback indicates Chinese government support to the A-share market, which is positive for the Hang Seng Index.
• China’s State Council, the Cabinet, unveiled monetary and fiscal policy measures on Wednesday to help the country’s troubled small companies by forcing financial institutions to increase lending support. China recently had seen increasing financing troubles for small, privately-owned companies, particularly in Wenzhou, a booming town in the province of Zhejiang.
• China’s passenger-car sales to dealerships in September rose 8.8 percent from a year earlier to 1.32 million units, the China Association of Automobile Manufacturers said on Thursday.
• Bank of Korea (BOK) maintained its benchmark interest rate at 3.25 percent. This was the fourth successive BOK meeting where the rate remained unchanged.
• Indonesia cut its benchmark interest rate from 6.75 percent to 6.50 percent, while the market had expected no move. This is the first rate cut since August 2009. The government is ready to help the economy in case the European debt crisis hits hard on its export business.
• Korea’s producer price index climbed 5.7 percent on a year-over-year basis in September, growing at the slowest pace in nine months.
• Korea’s automobile production grew 10.3 percent year-over-year in September due to solid demand from both domestic and overseas markets.
• Malaysia’s industrial production gained 3 percent year-over-year in August as manufacturing and electricity output climbed. The result far exceeded expectations for a 0.4 percent jump. Malaysia is not an export-driven economy compared with other Asian countries.
• During China’s Golden Week holiday that ended on October 7, 302 million tourists traveled throughout the country, an 18.8 percent increase year-over-year. Tourism revenue for the week reached 145.8 billion Rmb, a 25.1 percent increase year-over-year. This shows consumer spending in China is still robust, probably a bright spot in the slowing Chinese economy.
• The Slovakian parliament approval removed the final obstacle to expanding the eurozone’s rescue fund. The measure received support from 114 members, with 30 voting against and three abstaining. The European Financial Stability Facility will be increased to $600 billion.

Weaknesses

• September’s inflation was still mainly due to food price hikes, which went up 13.4 percent on year-over-year basis and up 1.1 percent month-over-month, contributing 4.05 percent of total CPI.
• China’s September exports were up 17.1 percent, and imports were up 20.9 percent, versus consensus estimates of 20.5 percent and 24.2 percent. The slower growth rate in exports had been indicated in September’s Purchasing Manager’s Index (PMI) lower new order book.
• Thailand consumer confidence fell to 72.2 in September from 73.8 in August, falling for a second straight month due to the worst flooding in five decades. The Bangkok stock market fell on Wednesday reacting to the flood damages. However, Thailand Prime Minister Yingluck has said yesterday that the country has avoided the worst scenario by finding channels to redirect the waters out of Bangkok.
• Korea’s third quarter foreign direct investment declined 24.6 percent, the most since the first quarter of 2009. All indicators are pointing to an economic slowdown due to external factors that are the European and U.S. economies. A slowing Chinese economy is also negative for Korea since a third of its export goes to China.
• Philippine exports declined 15.1 percent year-over-year to $4.5 billion in August as sales of electronic goods dropped. The decline was the biggest since September 2009.
• Brazil inflation climbed after the 0.5 percent interest rate cut at the end of August. Inflation rate rose 7.31 percent in September from a year earlier, the highest level in more than six years.

Opportunities

• The Chinese corporate Inventory to GDP ratio remains at a decade low level.
• The chart below by BCA research shows that after destocking in 2009, Chinese corporate inventory has remained lean. That means if there is another 2008 shock in the export decline, a plummeting in inventory is less likely, so there would be less negative impact on Chinese production activities.  This is another positive factor that helps China’s soft landing.
• In a positive development for the Russian consumer sector, Unilever is acquiring cosmetics producer Kalina for $535 million. The deal comes at 46 percent premium to Thursday’s close and implies multiple of 12 times the enterprise value (equity plus debt), well above the average multiple for the sector.

Threats

• The U.S. Senate has just passed a currency bill to threaten China with a 30 to 60 percent tariff on all Chinese imports to the U.S. If it becomes law, a trade war between the two countries could start, though we believe it is unlikely the bill will pass in the Congress. The proposed law would hurt both China and the U.S.
• The main challenge of the newly elected government in Poland is to commit itself to cutting the budget deficit to 3 percent of GDP in 2012 from this year’s 5.5 percent of GDP. This should enable Poland to stay below the 55 percent of GDP public debt prudential threshold.