Emerging Markets Radar (January 14, 2013)
Strengths
- China December exports were up 14.1 percent versus the 5 percent estimate; December imports were up 6 percent versus a 3.5 percent estimate. An improvement in exports can help China expand business activities.
- China December total social financing was Rmb1.6 trillion, up 29 percent year-over-year. M2 grew 13.8 percent, lower than the market expectation of 14 percent, but in line with the 2013 market expected range of between 13 to 14 percent. M1 grew 6.5 percent year-over-year, 1 percent higher than in October, partly due to banks’ efforts in attracting more deposits to meet the loan-to-deposit ratio (LDR) for the end of the year.
- China passenger vehicle sales were up 8.6 percent in December, and 8.3 percent for 2012. Luxury brands outperformed: BMW was up 74 percent for December, and 40 percent for 2012.
- The Shenzhen B share Index was up 26.26 percent since early October. We pointed out at the time that it is an opportunity for a B shares re-rating when converting to H shares listings.
- According to CITIC Securities, construction engineering and materials sectors will be the beneficiaries of China’s new urbanization plans.
Weaknesses
- Beijing restricts housing-fund loans from being used for purchases of second homes.
- China December new lending was Rmb454.3 billion, below the estimated Rmb550 billion.
- China December inflation was up 2.5 percent, higher than November’s reading of 2 percent and the market expectation of 2.3 percent. This increase mostly was due to cold weather across the country, which caused vegetable prices to rise, but it is worth noting that grain prices are inching up. A rising inflation will concern the monetary authority to steer to a tightening bias.
- Bank of Korea revised down its 2013 economic growth outlook to 2.8 percent.
Opportunities
- The chart above shows that Chinese stocks are still undervalued below their economic potential. In a normal market, the Chinese stocks, relative to global stocks, should be priced at the level of China GDP relative to Global GDP. H shares, represented by the HSCEI Index, had rallied 31 percent since its low in September, and still are expected to gain more than 20 percent for 2013 both through multiple expansion, dividends payout, and earning upside revision, according to CICC.
- China’s National Development and Reform Commission just approved a $483 million nuclear project, the first time since the 2010 Japanese earthquake shook up global confidence in nuclear power plants over safety concerns.
- In wake of the crisis, eurozone entry dates for new members were largely postponed. As the future of the eurozone clears, convergence is back on the table. Latvia will make a formal eurozone entry application in February, for entry in 2014, and Poland's prime minister Donald Tusk last month raised the prospect of relaunching his country's bid to join the euro soon, according to Reuters.
Threats
- Shadow banking in China is essentially an extension of the regular banking driven by regulatory arbitrage, according to Citi AP Economics Research. The Chinese banks basically take deposits in the name of Wealth Management Products (WMP) and lend out through purchasing loans issued by trust companies and local government financing vehicles. The risk of those products is asset-liability mismatch and default by the borrowers. Since WMP is providing liquidity to those entities, the regulators may tighten the criteria of WMP instead of stopping the activities.
- H share coal stocks had rallied 46 percent on average since their lows in September last year. Without an improving coal price in China, the stock prices may have moved ahead of fundamentals.
- Due to weaker demand and investments, Citi research expects Polish GDP growth to slow to 1.3 percent in 2013.
