Emerging Markets Radar (October 9, 2012)

Emerging Markets Radar (October 9, 2012)

Strengths

  • China’s September PMI rose to 49.8 from 49.2 in August, closer to the 50 level, above which economic activities are expanding. The good news inside the index was that the output component rose from 50.9 to 51.3; new orders increased to 49.8 from 48.7; and new export orders jumped to 48.8 from 46.6.  The finished goods inventory edged down to 47.9 from 48.2, indicating the de-stocking process in China is reaching an end.
  • Philippines’ net bank lending expanded by 16 percent on a year-over-year basis in July, while non-performing assets eased to 2.67 percent from 3.07 percent a year ago. Also in the Philippines, September inflation eased surprisingly to rise just 3.6 percent, versus the consensus 3.8 percent, and lower than the 3.8 percent seen in August.
  • Indonesia’s headline CPI inflation rose only 4.3 percent in September from a year ago, significantly below the market expectation of 4.6 percent. Also in September, Indonesia’s current account showed a surprising surplus of $249 million, in spite of a bigger drop for exports than for imports.

Weaknesses

  • Indonesia’s exports decreased 24.3 percent in September, worse than the 12.6 percent decline expected by Bloomberg, while imports decreased 8 percent.
  • Thailand’s September inflation was 3.38 percent year-over-year, slightly higher than the market expectation of 3.3 percent.
  • Singapore’s manufacturing PMI fell in September to a four-month low of 48.7, with falling new orders, new export orders and productions. PMI below 50 indicates that economic activities are contracting.
  • Macau’s September gaming revenue rose 12.3 percent year-over-year to MoP 23.9 billion, below the street estimate of MoP 25 billion. The lower growth was partly caused by the Mid-Autumn holiday which fell on the last day of the month while it was in mid-September last year.
  • Malaysia’s exports in August fell 4.5 percent from a year ago, the largest contraction seen since September 2009. The export decline was led by crude petroleum and palm oil, falling 28.8 percent and 27.2 percent, respectively.

Opportunities

Thailand Urbanization Investment  - U.S. Global Investors

  • The graph above shows the stages of urbanization driven by growth of GDP per capita. It shows Thailand probably has the most potential to urbanize from the current level. The urbanization process will drive demand for bank loans and housing sales, along with other big-ticket item consumer goods.
  • Despite the recent push higher, the rupee remains fundamentally undervalued.  As the chart below shows, India's real effective exchange rate (REER) – that is, the trade weighted average of the country's currency adjusted for inflation – remained near record lows in September, at more than two standard deviations below its 10-year average.

India Real Effective Exchange Rate - U.S. Global Investors

  • The next chart shows India’s REER against a host of other emerging markets.  Again, the rupee appears fundamentally undervalued across the emerging market universe.

India Rupee vs Other EM Currencies - U.S. Global Investors

Threats

  • Diesel demand growth in China is now only 0.7 percent year-to-date as of the end of August, much lower than gasoline demand growth of 10.9 percent. Since 50 percent of the diesel consumption is for logistics, and 70 percent for industrial sectors, it confirms slowing industrial activities in China this year.
  • Bond investors were frightened after shelling in Syria spilled over the border into Turkey, sending yields up to the highest level in two months as the government in Ankara retaliated against the shelling. The incident shows the mounting risks for Turkey of the violence that has engulfed Syria. Turkey is a NATO country with the second largest army among NATO countries, after the U.S.
  • Russia’s central bank held back from raising interest rates after a surprise increase last month, a pause that may prove brief after inflation quickened past the target range to 6.6 percent, the highest in 10 months.
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