Emerging Markets Radar (January 16, 2012)

Emerging Markets Radar (January 16, 2012)

Strengths

• The People’s Bank of China (PBOC) 2011 financial statistics show that M2 growth rebounded significantly to 13.6 percent year-over-year at the end of December. With seasonal adjustments, this represents a 26.8 percent month-over-month increase on an annualized basis. Many attribute the monetary expansion to fiscal expansion measures taken by the Chinese government. In an early December Investor Alert, we discussed that we were at the beginning of a monetary easing cycle in China as the government tries to fine-tune the economy.
• The amount of new loans in China during December was Rmb 640.5 billion, higher than the estimated Rmb 575 billion.
• After targeting Rmb 7.5 trillion in 2011, China may set its 2012 new bank loan target at Rmb 8 trillion. Money supply growth is expected to be 14 percent and CPI at 4 percent, the Oriental Morning Post reported. The government may ease lending to infrastructure projects and local government financing vehicles (LGFV) this year.
• China’s online gaming revenue rose 32.4 percent (year-over-year) to Rmb 2.85 billion in 2011, while the mobile game market’s revenue rose 86.8 percent year-over-year to Rmb 1.7 billion, Xinhua News reported.
• After sinking 28 percent in value during 2011, China’s domestic stock markets (as measured by the CSI300 Index) have started 2012 by posting a 6.5 percent gain after the first five days of trading. The increase is driven by monetary easing policy and market participations by domestic institutions. After Premier Wen Jiabao called for boosting confidence in the domestic stock market, the China Securities Regulatory Commission (CSRC) will pursue reforms in IPO pricing mechanisms to prevent excessive high pricing, will encourage improving corporate dividend payouts, and will try to increase the proportion of corporate bonds financing.
• China’s December CPI dropped to 4.1 percent, a 15-month low, after peaking in July. This drop will provide room for China to increase money supply. China’s December PPI dropped 1 percent from November, indicating core input prices are declining faster than the market expectation.
• Korea’s December PPI rose 4.3 percent from the previous year but was down 5.1 percent from the previous month. The Bank of Korea maintained its benchmark interest rate at 3.25 percent for the seventh straight month, a widely-expected move.
• The China Auto Association announced that December 2011 passenger car sales were up 4.6 percent. The market had expected no gain due to a high base effect in December 2010 when the stimulus plan came to expire. The Association also forecast 2012 passenger car sales to grow 7 percent after growing 5.19 percent in 2011.
• Macau gaming names gained in the week after reporting 850 million a day (Macanese pataca) in gaming revenues for the first eight days of the year. This is similar to last year’s Golden Week in October.
• China’s National Energy Administration plans to double solar capacity this year and add four times the capacity by 2015. Solar stocks globally jumped on the news this week.
• Russia’s inflation dropped lower than post-Soviet lows, falling to 6.1 percent on a year-over-year basis. December’s inflation number is significantly lower than the 2010 average annual figure of 8.8 percent. However, Roubini Global Economics is forecasting inflationary pressures to reemerge in the latter part of 2012.

Weaknesses

• China’s December exports were up 13.4 percent while imports were up 11.8 percent. Imports were lower than the market consensus, indicating slower export/import growth and increased pressure for China to further ease money supply.
• Continued weakness in electronics shipments drove Philippine exports to drop 19.4 percent year-over-year in November, the seventh-straight month of declines. Consensus estimates were for a 10 percent drop. Nevertheless, Philippine exports are a small share of the country’s GDP. The 2012 Philippine economy will be driven by domestic consumption, infrastructure investments and overseas remittance.
• Malaysia’s industrial production gained 1.8 percent year-over-year in November, the slowest pace in four months, as mining contracted and manufacturing eased.
• China’s foreign-exchange reserves dropped for the first time in more than a decade as foreign investment moderated. The holdings fell to $3.1 trillion on December 30 from $3.2 trillion on September 30, data released on the People’s Bank of China shows.
• China’s power use growth may slow to 8.5 percent this year, Xinhua reported, citing the deputy director of China’s State Electricity Regulatory Commission. Electricity consumption slowed to 11.7 percent last year from 14.5 percent in 2010.
• Signs that Chinese lenders will postpone losses on trillions of yuan loans made to local governments may undermine investor confidence in the banking sector, Standard & Poor’s said on Thursday. This local government loan issue can never be fully understood or go away by the like-minded institutions and speculators. We believe it is a huge issue but resolvable given time and time is always on the side of the Chinese government.

Opportunities

• Russian producer TNK-BP’s PetroMonagas venture with Petroleos de Venezuela SA plans to boost output of heavy oil by 20 percent to 145,000 barrels a day in 2013.
• Weibo, a Chinese microblogging service run by Sina, has seen its user base reach more than 50 percent of the country’s entire Internet population of 500 million people, according to J.P. Morgan. As a leader in microblogs, Sina Weibo possesses unique opportunities to monetize the phenomena. Proliferation of tablets and smartphones should also give additional push to the microblogging trend.

Threats

• With China in a monetary easing cycle and the U.S. experiencing a slow but steady recovery, the European sovereign debt issue is the single biggest question for the market. Therefore, it is still advisable to not be surprised by short-term market volatility.
• BCA Research published a piece this week highlighting themes among the emerging market space. Among them, a U.S. dollar breakout coupled with emerging market currency weakness was mentioned. Unlike in 2008, the problems are now in Europe and developing countries, while U.S. growth is set to outperform other regions. BCA believes this only reinforces the case for a strong U.S. dollar as global capital favors U.S. assets, while emerging market currencies remain more volatile than they have been in the recent past.