Emerging Markets Cheat Sheet (October 31, 2011)

Emerging Markets Cheat Sheet (October 31, 2011)

Strengths

• China’s Flash PMI in October came in at 51.1, its first reading above 50 in four months. A PMI reading above 50 indicates the economy is in expansion mode and Asian markets have reacted positively to the news.
• China’s resources tax policy has been revised to be based on sales. It was previously based on production, which could have an adverse effect on corporate earnings when natural resources prices are down. Also, the tax was confirmed to be at 5 percent instead of the prior proposed rate between 5 and 10 percent.
• China has created 9.93 million jobs during the first nine months of this year and the country’s unemployment rate now sits at 4.1 percent. This is evidence of China’s robust labor market.
• After September’s slower inflation figures, China is probably passed the inflation inflection point. From October 17 to October 23, vegetable prices dropped 2.5 percent, and pork prices, the major driver of this year’s inflation rates, were down 1.8 percent on a week-over-week basis. Declining inflation should relieve the People’s Bank of China from further monetary tightening.
• China’s Premier Wen Jiabao said that the country’s economic policy will be fine-tuned as needed. China’s industry ministry said it is studying “stimulative policies” for smaller companies as a global slowdown threatens growth.
• China’s Shanghai Composite Index rose 6.74 percent with increasing volume for the week, reclaiming the 50-day moving average for the first time since the end of July. It was also the first uninterrupted “up week” in a year. However, the index is still down 12 percent year-to-date and its price-to-earning ratio is at the low of 2008.
• According to Citigroup, emerging market equity funds reported a second week of inflows as investors became more optimistic about the eurozone debt crisis. Funds investing in developing-nation stocks took in $1 billion for the week ended October 26. Adrian Mowat, JPMorgan Chase & Co.’s Hong Kong-based chief Asian and emerging-market strategist, said that, “we are now calling for emerging markets to outperform the developed markets. Everything in emerging markets got considerably cheaper in the last year.”
• Russia left borrowing costs unchanged after inflation slowed to 6.9 percent. Economic growth expanded the most in three years last quarter as lending to households spurred demand, Russia’s Economy Ministry said this week.

Weaknesses

• Korea’s third-quarter GDP expanded 0.7 percent from the prior quarter. This is down from the 0.9 percent growth seen during the previous quarter but slightly better than the consensus estimate. Consumer confidence in Korea slightly increased but is still trending lower.
• Barclays Capital highlighted that Thailand’s flood is the worst in more than half a century, and may have wiped out as much as 14 percent of paddy fields in the world’s biggest rice exporter, potentially erasing the predicted global glut of rice. The crisis has severely affected large and small farmers alike. Many are also looking at more damage because they have been unable to move their animals in time to save them. One of the government’s recent measures has been a temporary waiver of the 2 percent import tariff on soybeans, a major ingredient in feed production, in order to help the livestock industry keep costs under control.
• Brazil’s September jobless rate remained unchanged in September at 6 percent, higher than expected. It had been anticipated that it would fall to 5.8 percent.
• Colombian policymakers held borrowing rates at 4.5 percent as they gauge the impact of the European debt crisis on global growth.
• Faced with a widening current account deficit, the Turkish Central Bank tightened monetary policy. The bank scaled back its weekly repo auctions and will instead provide funds via its overnight lending facility.

Opportunities

• BM&FBovespa SA CEO Edemir Pinto said that there are 40 companies waiting to list on Brazil’s stock exchange once market volatility eases after the country’s central bank cuts interest rates to boost growth, Bloomberg reports. Pinto, head of Latin America’s largest securities exchange, said the worst of the recent financial turmoil is over and investors will return to Brazilian stocks. He maintains his forecast for 200 new share sales by 2015.
• The yield on 10-year bonds issued by Poland fell below the yield on Italian debt of the same maturity on the expectations of a rating upgrade to A- from S&P.
• Russia’s 18-year quest to join the World Trade Organization (WTO) moved closer to fulfillment this week after Georgia agreed to a Swiss proposal for a compromise between the two governments.
• This chart from BCA Research shows that China’s infrastructure spending per capita is still much lower than the amount the U.S. has invested in its roads, rails, telephones, living spaces and passenger cars. Therefore, BCA forecasts China’s infrastructure build-out will continue, in turn boosting demand for natural resources and machinery.

Threats

• Sales of residential properties in Shanghai fell 14.9 percent during the first nine months to 10.63 million square meters, the Shanghai Statistics Department said. Facing increasingly tight liquidity conditions, swelling inventory and slowing sales, more Chinese developers have moved to cut prices by 30 percent in order to lure customers, Phoenix News reported from Hong Kong.
• RGE reported that a recession in developed markets, continued deleveraging in the eurozone and risk-aversion stemming from the eurozone debt crisis will hit Africa mostly through trade channels and higher financing costs. Despite sub-Saharan Africa’s overall resilience, limited financial integration on a global scale and depressed developed markets could hold back the region’s expansion. As a result, RGE has reduced growth forecasts to 4.8 percent in 2011 and 4.7 percent in 2012. In particular, RGE is expecting southern Africa, which has expanded 3 percent year-to-date, to keep lagging behind West and East Africa. This is due to the region’s weaker demographics, slower population growth and less convergence potential as the region has a higher per-capita GDP in comparison to its West and East counterparts.
• Argentina’s President Cristina Fernandez de Kirchner was re-elected in a landslide win this week, securing nearly 54 percent of votes. Ms. Fernandez’s current popularity is mostly due to the health of the economy, which has boomed thanks to high prices for exports such as soya. Days later, after regaining control, President Fernandez implemented a controversial law requiring all oil, gas and mining companies to repatriate all export revenue.
• PIRA Energy Group forecasts flat-to-declining oil production in Russia. Monthly production data to be released by the Russian statistical agency next week will give investors a more detailed view of the near-term trends.