Emerging Markets Cheat Sheet (November 7, 2011)

Emerging Markets Cheat Sheet (November 7, 2011)

Strengths

• China’s railway ministry will get an additional 300 billion yuan of bank credit after receiving loan of 200 billion yuan, reports 21st Century Herald. Indeed, CSR Corp. and other rail equipment makers have received billions of payments from the ministry this week for their outstanding accounts.
• China’s finance ministry raised the threshold for payment of value-added and business taxes so that fewer small companies will have to pay the levy, according to a statement posted to its website this week. The new threshold is raised to Rmb 5,000-20,000 from Rmb 2,000-5,000.
• In China, prices of meat, chicken, aquatic products, eggs and vegetables have fallen for the last three weeks, pointing to a lower Consumer Price Index (CPI) number for the month of October. A declining CPI will be a relief for the People’s Bank of China (PBOC), which may provide room for PBOC to relax money supply.
• Indonesia’s consumer prices rose 4.42 percent year-over-year, unexpectedly slowing from previous months.
• Korea’s October CPI rose 3.9 percent year-over-year, missing market expectation for a 4.2 percent gain. Asian countries are showing a clear trend toward decreasing inflation.
• China’s five-year interest-rate swap dropped 5 percent the biggest decline in three years, after the central bank injected cash into the financial system, adding to signs that an easier monetary policy is being pursued.
• Malaysia’s exports grew 16.6 percent year-over-year in September, ahead of both last month’s gains and consensus estimates on higher sales of electronics and commodities.
• Russian oil output hit another post-Soviet record of 10.34 million barrels per day in October. Sluggish or declining output on the brown field is being compensated by robust growth from green fields.
• The Russian Manufacturing PMI index returned into positive territory (50.4) after a pause in the third quarter.  Both new export orders and total new orders have increased.
• Turkish Manufacturing PMI was stronger at 53.3 in October, the highest level in seven months, after 51.5 reading in September.
• In September 2011, passenger traffic at Istanbul International Airport was up 32 percent to 3.89 million passengers (up 29 percent year-over-year in domestic volumes and up 33 percent year-over-year growth in international passengers).

• Japan’s largest brewer, Kirin Holdings Co., will pay $1.35 billion for a 49.54 percent stake in Brazilian Schincariol Participacoes e Representacoes, completing its biggest acquisition as it seeks growth in emerging markets.
• Bloomberg reported that Japanese investors are buying the most South African rand bonds in more than two years and pumping yen into Brazilian real funds, seeking higher yields even as Europe’s debt crisis increases emerging-market currency swings.  Volatility among emerging market currencies are the highest since 2009.  Japan’s two-year government bonds offer yields of 0.14 percent, compared with 5.8 percent in South Africa and almost 11 percent in Brazil.  Foreign-asset buying and Bank of Japan intervention helped weaken the yen against all 25 emerging currencies tracked by Bloomberg this quarter.
• Bloomberg reported that Old Mutual Plc, the third-largest insurer in the U.K., said third quarter revenue rose 8 percent helped by growth in Africa, Asia and Latin America.  CEO Julian Roberts said that, “sales were driven primarily by emerging markets.”  Life assurance sales grew to 358 billion pounds a year from 331 million pounds a year earlier.

Weaknesses

• China’s October PMI dropped to the lowest level since February 2009 to 50.4 versus the market estimate of 51.8.  Although a PMI above 50 still indicates that economic activities are in expansion mode, the sub-indices for new orders, purchase price and new export orders had all fallen from the prior month, while inventory was up. Those sub-indices indicate the Chinese economy is still in the process of slowing.
• Korea’s exports rose 9.3 percent year-over-year in October, climbing at the slowest pace in two years. Imports rose 16 percent. The numbers showed weakening external markets for Korea, and global exporting countries. In particular, Korea’s KOSPI index is highly correlated with the global economy and metal market activities.
• Thailand’s CPI rose 4.19 percent in October, holding above 4 percent for the seventh straight month as food costs soared during the flooding.
• Taiwan’s third-quarter GDP advanced 3.4 percent versus the estimated 3.6 percent.
• The Philippines CPI rose 5.2 percent in October, climbing for the second-straight month after utility and food costs increased.
• Hungarian PMI dropped to 48.2 in October from 50.7.  Spillover risks from the Eurozone are growing and Hungary could face a recession next year.
• Honda Motor Co. plans to reduce production in Brazil, England and the Philippines because of part shortages stemming from the floods in Thailand.  Honda hasn’t decided when the production will resume, Bloomberg reported.
• South Africa’s petrol pump prices rose by 23 cents or 2.2 percent on Wednesday.  Wholesale diesel petrol increased by 3.7 percent.  South Africa is a net importer of oil and adjusts its fuel price each month to account for changes in the rand exchange rate, the international oil price and government levies.

Opportunities

• The graph below by Deutsch Bank shows how China’s increase in new loans drives up the copper imports into the country. China International Capital Corp’s banking team found that the big four banks in China lent Rmb 100 billion in two working days at the beginning of this week, confirming  the increase. The lending speed is consistent with Rmb 600 billion of new loans in October, and Rmb 700 billion in the next two months. For the year, total new loans will likely be Rmb 7.7 trillion, slightly ahead of the full year target of Rmb 7.5 trillion.



• The Central Bank of Turkey allowed banks to keep up to 10 percent of their reserves in gold.
• With luxury goods showing strength in a period of global economic uncertainty, Burberry Group Plc announced that it will open a third store in Brazil.

Threats

• China’s October PMI indicates economic growth is slowing, along with slowing export and money supply growth.  Without easing current tightening monetary policy, China may see an increase in bankruptcy and bad loans by small business and property developers.
• In Poland, the zloty’s steep fall has turned attention to public debt dynamics and inflation.
• Under Argentinean President Cristina Fernandez de Kirchner’s recent re-election, sellers of foreign-made cars are being forced to become exporters of everything from bio-diesel to bottled water in return for access to an auto market that’s growing 30 percent a year.  Argentina introduced the program in March to boost exports, increase investment in local industry and shore up dwindling central bank reserves.  Porsche importer Hugo Pulenta has now promised to ship wine from his family’s vineyards in the Andean foothills in exchange for permits to bring his expensive cars into Argentina. Similarly, Mitsubishi Motor Corp’s representative will export peanuts while imported Subarus will be matched by sales of chicken feed to Chile.
• Roubini Global Economics had revised down their 2011 growth forecast for Thailand to 1.6 percent.  This is considerably lower than the central bank’s recently revised estimate of 2.6 percent, but attributed to the projected 4.1 percent year-over-year contraction in the fourth quarter caused by the effects of flooding on industry and agriculture.
• Brazil is now facing a $100 billion hit in agricultural output if the senate rejects legislation that would forgive farmers for illegally clearing protected rainforest.  If the bill is not approved, farmers would be required to reforest about 70 million hectares of land currently under coffee, oranges and other commodities.  Brazil is the world’s top producer and exporter of coffee and sugar cane, the biggest beef exporter, the largest producer of oranges and the second-largest producer of soy.  The bill would update the 1965 Forest Code, which requires farmers to keep a certain percentage of their land as forest.