Emerging Markets Cheat Sheet (October 24, 2011)

Kuala Lumpur, Malaysia

Emerging Markets Cheat Sheet (October 24, 2011)

Strengths

• China’s industrial production increased 13.8 percent in September, while the market estimate was 13.4 percent, and August was 13.5 percent. Fixed Asset Investment excluding rural households climbed 24.9 percent, better than market consensus of 24.8 percent in the first nine months of the year, but slower than 25 percent up for the first eight months at the end of August. Property investment for January to September rose 32 percent, from 33.2 percent through August, still showing some strength. Retail sales expanded 17.7 percent, better than the estimate of 17 percent. Chinese consumer spending is the policy focus for growth to adjust China’s GDP weighting more toward consumption.
• China has allowed four provinces and cities to issue local government bonds for the first time. This might be the central government’s first step toward swapping local government bank loans for local government bonds. This would avoid any default of bank loans by the local governments.
• The Bank of Thailand kept its benchmark one-day bond repurchase rate at 3.5 percent. All Asian central banks stopped further monetary tightening in September.
• Growth in consumer-facing sectors in Russia remains robust. Retail sales expanded by 9.2 percent year-over-year in September, and grew by 7.5 percent for the third quarter as a whole.
• Russia, Argentina and Colombia were the three best-performing emerging markets countries for the week in U.S. dollar terms.
• Scotiabank emphasized how “opportune” it is to invest in Asia and Latin America. Canada’s third-biggest bank agreed this week to buy a 51 percent stake in Banco Colpatria Red Multibanca Colpatria SA of Colombia for approximately $1 billion dollars. This is Scotiabank’s largest international takeover, according to Bloomberg. The bank’s strategy is to expand where clients such as property developers and mining companies are doing business.
• Retail sales grew in August for South Africa, accelerating to 7.1 percent, more than the revised 3 percent growth in July.

Weaknesses

• The chair of China’s Bank Regulatory Commission said the risk of mortgage loan defaults is manageable for the banks even if housing prices drop 40 percent. The market interpreted his statement as an indication that China won’t lift housing market controls with falling property prices. In addition, China’s housing ministry may ask local governments to consult the authorities before adjusting real-estate curbs, the China Business Journal reported.
• China foreign direct investment gained 7.9 percent to $9 billion, the slowest pace in three months, as companies pared spending amid global economic concerns.
• Russian industrial production growth in September was lower than in August and only 3.9 percent up from a year earlier, the slowest pace since it began expanding in October 2009, as increasing risks to the global economy weighed on inventory accumulation.
• Asian markets experienced weakness with Taiwan and India being among the bottom three country performers. Turkey led the laggards, down 4.23 percent for the week. Central Bank of Turkey (CBT) loosened liquidity in 2009 – 2010 to support the economy, and tightened it in first half of this year to slow growth. CBT again has been providing liquidity since July of this year, but this week raised overnight interest. This chart from Unicredit shows that the liquidity CBT gives with one week repos and draws with reserves is square at the moment.

• Monetary policy changes in Brazil saw interest rate cuts despite inflation rising to 7.3 percent in September. Brazil’s bank cut rates to 11.5 percent from 12 percent, after increasing them five times this year to combat rising prices. The economic growth forecast for 2011 has been reduced to 3.5 percent as well.
• This week, South Africa’s Competition Appeal Court began hearing a government filed lawsuit to compel regulators to review a decision allowing Wal-Mart Stores Inc. to buy control of Massmart Holdings Inc. Lawyers for the union are claiming that regulators failed to take account of negative effects on the economy or jobs. In June, Wal-Mart, the world’s largest retailer, paid $2 billion for a 51 percent stake in Massmart Holdings Ltd., South Africa’s largest food and general-goods wholesaler.

Opportunities

• Chinese government savings are increasing to above 8 percent of GDP, as shown in the first chart shows. The second chart shows that the Chinese central government holds RMB 3.9 trillion of deposits with the central bank, or 8 percent of GDP. All of this provides the authorities a massive liquidity buffer to deal with an emergency situation.

• The Russian economy may have expanded 4.5 to 5 percent in the third quarter. Having stagnated during the early part of the year, investment has picked up recently and grew to a nine-month high of 8.5 percent in September. Allowing for a recovery in agricultural output following last year’s droughts, economists are raising their forecasts for GDP growth during the quarter.
• HSBC flash Purchasing Managers Index (PMI) numbers for China will be coming out Monday. This will give a preview of China’s strength or weakness of the country’s manufacturing activity.
• French President Nicolas Sarkozy and German Chancellor Angela Merkel will be meeting this weekend for the E.U. and eurozone Twin Summits meeting. The Elysée Palace website highlighted a Franco-German statement depicting the three main focuses of the meeting: the implementation of the eurozone’s bailout fund, a recapitalization plan for European banks, and the implementation of eurozone economic governance and strengthening European integration. The conclusions reached at this meeting will create material effects worldwide.
• In the International Monetary Fund’s latest regional report, Sub-Saharan Africa is expected to show 5 percent growth for the year, and an even more promising 6 percent for 2011.

Threats

• Asian investors became overwhelmed and confused by mixed signals from eurozone officials who are involved in resolving the Greek debt situation. Investors are also concerned with increasing risks that the U.S. may not recover meaningfully for a long time, which can impact exports from Asian countries such as China and Korea. In the last couple of months, Chinese stocks have been bombarded with speculations and reports on a private lending bubble, shadow banking involving Chinese banks, local government loan risks, and a slowing economy. Although many sectors of Hang Seng Composite Index have reached valuations at or below the lows of 2008, there is a risk that investors tend to over-shoot in short term.
• The recent sell off in Emerging Europe’s currencies might lead to a pick-up in inflation and put pressure on policymakers to raise interest rates.
• Concern in Argentina is increasing as the risk of non-payment rises based on the fact that President Cristina Fernandez will continue to draw on a declining amount of central bank reserves to pay debt instead of adopting policies that would give her access to global credit markets. Central bank reserves fell 8.7 percent to $48 billion from $52.6 billion in January as capital flight forced the central bank to sell to curb the peso’s decline. Traders are now forecasting a 44 percent debt default should Fernandez be re-elected, who is a favorite to win elections.