Emerging Markets Radar (August 20, 2012)
Strengths
- Malaysia’s second quarter GDP accelerated to 5.4 percent year-over-year, higher than the consensus 4.6 percent. CPI for July fell to 1.4 percent from 1.6 percent in June, lower than the consensus 1.6 percent.
- Chinese premier Wen Jiabao said China has more room for stimulus policies since inflation has come down. He also told local business people and government officials in Zhejiang province that the economy is stabilizing.
- China railway investment for the next five months is expected to be about 50 percent higher than the amount invested in the same period last year.
Weaknesses
- Indonesia’s current account deficit widened sharply to $6.9 billion or 3.1 percent of GDP in the second quarter. The Bank of Indonesia (BI), therefore, tightened monetary policy by raising the deposit facility rate by 25 basis points to 4 percent which will push up the interbank borrowing rate. BI also strengthened the loan-to-value ratio to 70 percent for housing and vehicle loans.
- China’s July power demand grew 4.5 percent, lower than the 5.4 percent total demand growth year-to-date. Industrial power demand continued slowing.
- Taiwan’s second quarter GDP contracted 18 basis points, more than the estimate of 16 basis points.
Opportunities
- According to research from ING, the dividend effect on stock outperformance is healthy in emerging Europe and is most prominent among Turkish stocks, some of which pay close to a 10-percent dividend.
- Prior to ex-date, the dividend effect is driven by interest from high-yield equity funds. Post the ex-date, the dividend effect exists due to: 1) cheapness on a P/E basis; and 2) a dividend reinvestment effect into the stock and sector.
- Recovery in Property Transaction Should Improve Cash Flow for Chinese Developers
The chart below shows July’s housing transactions have picked up on a yearly basis. This will help cash flow for developers, and also reduce inventories. The housing market needs further inventory reduction before new starts can go up.
Threats
- The much hoped for bank reserve ratio reduction by the People’s Bank of China has not arrived. Liquidity tightness in the banking system has affected new loan growth, which will slow the growth recovery of the economy.
- As European policy-makers return from their usual long holiday, the German constitutional court may rule against current transfers.
- Republican and Democratic conventions in the U.S. may reduce the opportunity for compromise on the fiscal cliff.
