Emerging Markets Radar (August 6, 2012)
Strengths
- Chinese President Hu Jintao presided over a Central Politburo meeting on July 26. He reaffirmed maintaining stable growth as the top priority and pledged to increase the policy support for the real economy. The frequent economic meetings hosted by the president and premier in late July suggest a higher probability for more follow-up measures soon to stabilize growth.
- China’s new bank lending may be about Rmb 700 billion in July, Economic Information Daily reports, showing the gradual rising of money supply.
- The Ministry of Railway announced that it plans to spend RMB470 billion on railroads and bridges this year.
- Money supply in the Association of Southeast Asian Nations (ASEAN) countries is robust, driven by infrastructure and property, and consumer spending. Singapore total domestic banking loans shows 20.9 percent growth year-to date by the end of June, while it is 12.6 percent for Malaysia, 26.2 percent in Indonesia, 14.6 percent in Thailand, and 14.7 percent for Philippines.
- Singapore’s unemployment rate fell in the second quarter to 2 percent from 2.1 percent the previous three months.
Weaknesses
- China’s PMI, China’s official gauge of manufacturing activities, declined by 10 basis points from 50.2 in June to 50.1 in July. It is lower than market consensus of 50.5.
- Taiwan’s second quarter GDP was down 0.16 percent, versus the estimate 0.5 percent.
- Korea’s industrial production rose 1.6 percent in June, missing expectations for a 1.8 percent increase and down from May’s 2.6 percent.
- Thailand’s exports fell 4.3 percent in June while imports rose 5 percent, further demonstrating robust domestic demand in the country. Companies that are selling to the world market are, in general, seeing sales earning growth slow down, while those that sell to domestic demand, such as telecom, utilities and property companies, are still seeing robust growth. The same happens to China and other ASEAN countries.
- Hong Kong June trade growth missed expectations. Exports were down 4 percent year-over-year and imports down 2.9 percent.
- Korea’s second quarter GDP expanded 2.4 percent, growing at the slowest pace in almost three years, below the median estimate for a 2.5 percent gain.
- China’s Xi’an city said it would limit vehicle ownership to control traffic congestion.
Opportunities
- The recent strong support for the European project voiced by both the ECB and the German political establishment provides significant tail risk of increased forms of monetary policy support in the coming weeks.
- After the surprise July rate cut in South Africa, the market is pricing in a 25 percent chance that the Monetary Policy Committee will follow up with a further 50 basis point cut by year end. Monetary policy is already very accommodative and the policy rate is at multi-decade lows.
- Already representing 17.5 percent of the world’s population, India is projected to surpass China to be the most populous country in the world by the year 2025. With more than 65 percent of its population below the age of 35, it is expected that in the year 2020, the average age of an Indian will be 29 years compared to 37 for China.
- The dividend yield of telecom companies in Asia, excluding Japan, is close to 5 percent on average. The dividends are sustainable due to high free cash flow yield. This compares favorably with 10-year U.S. Treasury which yields less than 2 percent.
Threats
- Investors have heard many times from the Chinese government that it is committed to secure economic growth, but the government’s actions are still behind the curve. Particularly, its inability to find a balanced property policy will affect the growth of the economy.
- High household debt burden, reduced consumer purchasing power, and a relatively weak domestic growth outlook bode ill for banking sector growth in Brazil. Existing banking sector stress is likely to grow over the coming quarters on the back of declining interest rates and deteriorating asset quality.
- The Czech central bank forecasts gross domestic product to contract 0.9 percent in 2012, as measures to curb the budget deficit damp domestic demand. The economy relies on demand for cars, auto parts and electronics from the European Union, which buys about 80 percent of Czech exports.
