Emerging Markets Radar (December 19, 2011)

Emerging Markets Radar (December 19, 2011)

Strengths

• With depressed market prices, the China Region Fund has been able to pick companies that trade below book value, but still expected to grow revenue more than 10 percent a year.
• Indonesia’s sovereign debt was upgraded by Fitch Ratings to BBB- from BB+ with stable outlook. “The upgrades reflect the country’s strong and resilient economic growth, low and declining public debt ratio, strengthened external liquidity and a prudent overall macro policy framework,” said Philip McNicholas, Director of Fitch’s Asia Pacific Sovereign Ratings Group.
• Also in Indonesia, the Parliament passed the Land Acquisition Bill this morning, essentially eliminating deadlock in land use for public infrastructure construction. In the past, landowners could not be forced to yield their land for public use. With the new law, once the government has gone through some legal procedures with the landowners and has paid, the land is deemed for public use. This is significant for Indonesia since the country is planning to build massive infrastructure in the next five years.
• Gou Shuiqing, head of China’s Retirement Pension Plan, said that China has 4 trillion in plan money that can be invested in stock market.
• China and Hong Kong agree to “deepen cooperation between the Mainland and Hong Kong in financial services and product developments. The new agreement on RMB Qualified Foreign Institution Investors (RQFII) will mark the first formal channel for yuan offshore to be invested in the China’s domestic markets.
• Korea’s unemployment rate was 3.1 percent in November, unchanged from the previous month.
• JP Morgan reported that the strongest performing sector of Chinese retail in 2011 has been gold, silver and jewelry retail. The driver behind this has been the demand increase from lower-tier cities where income levels are rising the fastest and improvements in retail infrastructure have allowed for rapid store expansion.  During the third quarter alone, China was the single largest market worldwide, accounting for 28 percent of global jewelry demand, and was one of four markets to show healthy growth (Hong Kong, Japan and Russia being the other three).
• South Africa, which has the highest unemployment rate of 61 countries tracked by Bloomberg, added 59,000 non-farm jobs in the third quarter, increasing employment by 0.7 percent.
• Protests in Moscow and other Russian cities following parliamentary elections were mostly peaceful and received more national TV coverage than usual.  Authorities were keen to avoid any violence, and kept pro-regime demonstrators away from confronting the protesters.

Weaknesses

• China’s November M2 money supply grew 12.7 percent, lower than the market expectation of 12.8 percent. This was also the lowest reading since May 2001 when M2 gained 12.1 percent. November new loans were at 562.2 billion RMB.  Although this was higher than the market consensus of 550 billion, it was not large enough to improve market liquidity. China also saw foreign direct investment decrease 9.8 percent in November, indicating investors’ concern about slower growth in the country.
• China’s exports grew 13.8 percent to $174.46 billion, slower than 15.9 percent in October on a year-over-year basis. Imports gained 22.1 percent to $159.9 billion, with a shrinking trade surplus of $14.52 billion.
• Electricity consumption for November in China went up 9.9 percent year-over-year, easing 1.4 percent month-over-month, indicating slower industrial growth.
• HSBC China’s December purchasing managers’ index (PMI) was up 1.3 to 49 from 47.7 in November. Although the reading was improved, a PMI below 50 still indicates China’s economic activity is in contraction mode.
• Philippine exports fell 14.6 percent year-over-year in October, declining for a sixth-straight month as demand for electronic products continued to sag.
• Roubini Global Economics highlighted that Brazil recently placed 73rd on the 2011 Corruption Perceptions Index, down from 69th in 2010. The most recent minister resignation was amid allegations of corruption, which also doesn’t look promising for the country’s reputation.  President Dilma Rousseff, who has displayed less tolerance for corruption than preceding presidents have, is set to formally replace a number of ministers in the new year.
• South Africa’s inflation rose to 6.1 percent for the month of November, breaching the central bank’s target range for the first time in almost two years.  Higher fuel prices and a weaker rand were the two main drivers behind the acceleration.
• Poland published a draft of its new copper tax bill that is to be instituted March 1, 2012.  Investors reacted negatively to the draft, with the belief that it was higher than expected.  KGHM is Poland’s sole copper producer, and was down over 11 percent on the news. The tax is to be paid monthly, and the Finance Ministry has set the maximum level of the tax at approximately $9,138 a ton.

Opportunities

• The chart below is recreated from CLSA. It shows how Chinese stocks in Hong Kong and domestic B-shares (represented by MSCI China Index) rise and fall along with China’s M2 money supply. We anticipate the People’s Bank of China (PBOC) will be easing by creating more loans in the economy.

• Only a few days before beginning her second term in office, Argentina’s President Cristina Fernandez de Kirchner announced three major changes to her cabinet, welcoming in a new minister of agriculture, a new cabinet chief and a new finance minister. Markets reacted very positively to the new finance minister, Hernan Lorenzino, with five-year CDs dropping sharply in his first week’s appointment on hopes he will introduce more investor-friendly policies.
• In recent years, Turkey has ramped up capital spending in general and investment in machinery and equipment in particular, unlike other underinvested nations like Brazil, Mexico, Russia and South Africa that have failed to achieve higher investment ratios. Hence, the outlook for productivity gains in Turkey is superior to many other developing nations.

Threats

• According to Nouriel Roubini, a bailout would make everything work for Greece, whose GDP is expected to contract further for a fourth consecutive year to 5.7 percent year-over-year, before easing to 4.9 percent in 2012 and 2.1 percent in 2013.  RGE expects that should Greece be faced with a choice between years of austerity measures and recession, or an exit from the eurozone, that it will choose the latter.  Following an exit from the eurozone, RGE believes the country will regain competitiveness in 2013, by reissuing a national currency and allowing it to depreciate. This would allow GDP to fall by the increment of 2.1 percent that year.
• Hungarian government and local banks have reached an agreement on a five-year household foreign exchange loan aid program. The proposal provides an option to fix monthly installments for the next five years 35 percent below the current spot rate by sharing the losses between banks (two-thirds) and the state (one-third).
• The China Politburo meeting, in which economic policy direction for 2012 is set, concluded this week with the market being disappointed. Although the priority has become to support growth, followed by continuing structural change and maintaining price stability, China’s government clearly stated it won’t lift housing market curbs. With obvious down trend  in growth in GDP, exports, PMI, housing transaction and price, M2, bank deposit, new loans, the recent capital outflow added to the worries that China may face deflation risk.