Emerging Markets Radar (March 18, 2013)
Strengths
- China’s residential floor space sales surged 55.2 percent year-over-year in the January to February period, the fastest pace since late 2009, reflecting pent-up demand after two years of stagnation. Residential investment rose 23.4 percent and residential starts increased 17.5 percent for the same period.
- China’s passenger vehicle sales rose 20 percent year-over-year in the January to February period to 2.84 million units, in stark contrast to India’s 11 percent decline in the same period.
- Fitch raised Thailand’s credit rating to BBB+ with a stable outlook four years after political turmoil in the country, a positive recognition of Prime Minister Yingluck Shinawatra’s ability maintain social stability.
- Stocks in Poland and Turkey are entering their annual dividend season, and payments look particularly attractive this year, with yields reaching double-digit percentage points
- The Latin American corporate debt market is seeing increased demand allowing borrowers to fund their expenditures at significantly lower interest rates. Investors are boosting their risk tolerance amid near zero U.S. and Europe benchmark interest rates. Last month Colombia’s Banco de Bogota issued $500 million in 10-year bonds at 5.375 percent. Earlier this month, Cosan SA Industria & Comercio, a Brazilian large cap sugar and ethanol producer, sold $500 million in 10-year bonds at 5 percent. This week, CEMEX, the largest cement maker in the Americas, sold $600 million of 6-year callable bonds at 5.87 percent.
Weaknesses
- China’s real retail sales expanded by a lower-than-expected 10.4 percent year-over-year in the January to February period, the slowest pace since September 2011, affected by the communist party’s campaign against corruption and extravagance. Revenue from large caterers including high-end restaurants declined 3.3 percent vs. 14 percent gain a year earlier.
- South Korea’s unemployment rate unexpectedly rose to 3.5 percent in February from 3.2 percent in January, the highest in the last 12 months, as a result of moderating export growth and expanding the labor force.
- Higher-than-expected February inflation in China and the government’s renewed focus on curbing speculation in the residential property market weighed on both Chinese and Hong Kong markets this week.
- Renaissance Capital estimates that the Russian economy will grow by 1.4 percent in the first quarter, and is forecasting second-quarter growth of only 1 percent year-over-year. If these yearly forecasts materialize, it would mean consecutive quarters of negative quarter-over-quarter growth, technically qualifying as a recession.
- Dollar bonds sold by Argentine consumer products companies are missing out on the biggest rally in Latin American debt on concerns a price freeze by supermarkets will squeeze profits. President Cristina Fernandez pressured supermarkets to fix prices until April in an effort to contain inflation that economists estimate at 26 percent, more than double the official rate. Candy maker Arcor’s bonds returned 0.9 percent since the price freeze was enacted, while Latin American companies in the same sector returned 2.9 percent over the same period.
Opportunities
- The Chinese regulator’s invitation of overseas institutions to reinvest their Chinese yuan on hand in mainland markets, coupled with the country’s robust trade surplus and lingering international expectation of appreciating yuan, should help sustain foreign capital inflows to China. Ample liquidity lends support to domestic Chinese A-share equities, a strong sentiment indicator for Hong Kong traded Chinese names, amid an increasingly uncertain government policy environment.
- Over a 12- to 24-month horizon, earnings momentum within emerging Europe is strongest in Hungary and Turkey. Polish companies’ earnings are not expected to accelerate until 2014.
- Mexico’s credit rating outlook was raised from stable to positive by Standard & Poor’s on increased confidence that President Enrique Pena Nieto’s proposed legislation will boost growth in Latin America’s second-largest economy. The news dropped yields on benchmark peso bonds to a record. The news follows the March 8 move by Fitch Ratings, which revised the rating outlook from stable to positive on Colombia’s BBB sovereign rating, and the upgrade of Uruguay’s sovereign ratings to investment grade.
Threats
- Market perception of potentially more strong-handed new administration in China could increase near-term volatility of its residential property sector.
- President Vladimir Putin named Elvira Nabiullina, his chief economic aide, to become the next head of the Central Bank of Russia (CBR). In a parting shot, outgoing CBR chairman Sergey Ignatiev said that the capital flight out of Russia is controlled by a criminal, “well organized group of individuals,” costing the country 2.5 percent of GDP, or $49 billion last year, a claim immediately disputed by a presidential spokesman. The appointment of Nabiullina, a Tatar, aims to appeal to ethnic and religious minorities, but will she manage to preserve the independence of CBR?
- Chile has posted some remarkable numbers over the first two months of the year; retail sales, manufacturing index, economic activity, exports, and trade balance have all beaten analyst expectations. Furthermore, inflation is the lowest in Latin America, and one of the lowest among Organization for Economic Co-operation and Development members at 1.3 percent year-over-year, and GDP grew at 6.7 percent in January. Such successful economic indicators have driven the country’s multilateral exchange rate against its major trading partners to a 20-year high. Chile’s commodity exports give the country little pricing power and are highly sensitive to exchange rate fluctuations, a situation that threatens to slow down its spectacular growth this year.
