Emerging Markets Radar (March 5, 2012)

Emerging Markets Radar (March 4, 2012)

Strengths

• South Africa’s African National Congress expelled youth leader Julius Malema, who said the decision to eject him from the ANC is motivated by some party leaders opposed to his call to nationalize mines in a country where Anglo American, BHP Billiton and Rio Tinto have operations.
• South Africa’s purchasing managers’ index rose to the highest in two years in February, a signal the manufacturing industries in Africa’s biggest economy are rebounding from last year’s slump. The seasonally adjusted index rose to 57.9 from 53.2 in January, according to Johannesburg-based Kagiso, the financial services company that compiles the index. The median estimate of three economists surveyed by Bloomberg was 52.3. A number above 50 indicates an expansion in factory output.
• China’s February official PMI showed a better-than-expected 51, a 0.5 improvement from January. It confirms China is not experiencing a hard landing. The PMI sub-indices are positive too, with new export order, backlog order index, and purchase price index all up more than 4 percent. PMI above 50 indicates industrial activities are expanding.
• China’s four biggest banks will proactively support qualified developers to build regular housing to help increase the supply, Financial News reports. The banks aim to sufficiently increase loan demand for first home purchases for individual use, the report says. Also in news, the China Banking Regulatory Commission has allowed banks to continue lending to local government financing vehicles for land reserves and road construction, China Securities Journal reported Monday.
• Korea’s CPI rose 3.1 percent year-over-year in February, registering a 14-month low that was in line with consensus estimates.
• The Philippines central bank lowered the benchmark rate by 25 basis points, a move that was widely expected. This was the second 25 basis point rate cut this year.
• Indonesia’s CPI rose 3.56 percent in February, slowing for a sixth straight month. Indonesia’s exports rose 6.1 percent in January, improving from December’s 2.2 percent increase.
• Thailand also saw its CPI slow for a third consecutive month, rising 3.35 percent in February.

Weaknesses

• Brazilian exporters will start paying a 6 percent tax on some foreign loans as part of the government’s plan to curb capital inflows, said Aldo Mendes, director of monetary policy at the central bank. To avoid the tax, the advanced payment will also need to be provided by the importer, he added. Previously, banks and trading companies could provide the loans without the need to pay the tax. The Brazilian currency, the real, has year-to-date regained losses incurred in the third and fourth quarter of last year.
• The market was speculating that February new loans were Rmb 500 billion in China, much lower than the estimated Rmb 801.5 billion. If banks are constrained in making new loans, the monetary easing policy may have to accelerate to ease the liquidity tightness in the economy. In the market, investors are more interested in the central government’s stance on monetary easing than the existing liquidity tightness.
• China’s February home prices posted the biggest decline in 19 months as the government pledged to maintain curbs on property, according to SouFun. Home prices dropped 0.3 percent from January. Actually, the home price decline is not necessarily a bad thing if the sector wants the government to ease property curbs.
• Korean industrial production dropped 2 percent, the first such decline since June 2009, but output increased 3.3 percent from December, showing some improvement.

Opportunities

• South Africa has announced that it will upgrade its rail system beginning in 2015. The country will solicit international bids for 128 billion rand ($17 billion) worth of train coaches and locomotives as early as next month.
• Colombia’s central bank chief Jose Dario Uribe said this week that the country’s inflation rate this year will be lower than last year’s pace.  The country has recently taken monetary policy actions to keep inflation around 3 percent, while creating conditions for the country’s economy to have a high but stable growth.
• There has been a sharp increase in going-private transactions among China-based companies listed overseas since late 2010, and the trend gained significant momentum recently, according to a BCA research paper. Not long ago, Chinese firms were enthusiastically embracing initial public offerings and “reverse mergers” to get listed in overseas exchanges, particularly in the U.S. stock exchanges. The “going-public” boom has been replaced by a wave of “going-private” deals. There are several reasons for going private but the macro story is that valuations of some of these firms have become extremely attractive for insiders. In the last couple of years, global risk aversion, heightened concerns of a China “hard landing” and high profile alleged accounting scandals of some U.S.-listed Chinese companies have all painted Chinese firms with a bearish broad brush, and some companies are being unduly punished as a result.

Threats

• The big four banks in China lent over Rmb100 billion from February 1 to 24. Lending by China’s four biggest banks typically accounts for 40 to 45 percent of total bank loans. If lending by the four biggest banks didn’t pick up in the last week of February or smaller banks didn’t pick up the slack, February total loans could be disappointing.
• Investors in the biggest state-controlled companies are being punished with the lowest valuations in six years by emerging-market leaders putting public services ahead of shareholder profits as economies slow.  Brazil’s Petroleo Brasileiro posted a 52 percent drop in fourth-quarter earnings on February 9 after government-imposed price caps led to losses on fuel sales. Russia’s Gazprom said last month that tax increases will cut 2012 profit by $2 billion, while Coal India was ordered to sign supply agreements with the nation’s power companies.
• China’s banks are trading near record lows versus net assets on concerns local governments may default.
• Common shares of Petrobras, the world’s fifth-largest oil producer by market value, plunged 8.3 percent on February 10 after fourth-quarter earnings trailed analysts’ estimates because of higher costs for imported fuel.
• The average valuation of 47 state-owned firms in the BRIC (Brazil, Russia, India, and China) countries sank below that of the MSCI Emerging Markets Index in December for the first time since 2005, according to data compiled by Bloomberg. The four biggest developing nations are growing at the slowest pace since 2009 just as Russian Prime Minister Vladimir Putin seeks to reclaim the presidency on March 4 and China hands power to new leaders later this year.
• Poland’s estimated shale gas reserves, believed to be the largest in Europe, may be cut after analyzing data from the country’s first wells, the Polish Geological Institute said. The Polish institute and the U.S. Geological Survey are working together to analyze drilling results and will publish an estimate of technically recoverable resources of shale gas in Poland on March 21.