Emerging Markets Radar (July 29, 2013)
Strengths
- On Wednesday, flash composite PMI data for the eurozone came in better than expected, propelling shares to an eight-week closing high. Flash composite PMI data, featuring components for the manufacturing and services industry, rose to an 18-month high in July. The reading came in at 50.4 compared to June’s reading of 48.7. A reading above 50 separates expanding activity from contraction.
- Brazil’s consumer price index (CPI) fell 0.11 percent in the month ending the third week of July, marking the lowest reading since July 2011. Deutsche Bank reports that transportation, food and apparel continued to put downward pressure on inflation, as they fell by 0.80 percent, 0.42 percent and 0.54 percent, respectively. The drop in transportation was mainly due to a 3.1 percent drop in bus fares. The reading gives Central Bank Governor Alexandre Tombini confidence that the latest round of monetary tightening is having its desired effect in reining consumer price rises.
- China’s Premier Li Keqiang spoke in the State Council meeting late last week, stating that the “floor” for GDP growth would be 7 percent, and that China will focus on transforming into a consumption-based economy while continuing to invest in infrastructure, particularly railway and urban transit. China is currently fine tuning its economy using targeted stimulus such as supporting advanced manufacturing, information infrastructure, the environmental protection industry, as well as social services.
- In the National Development and Reform Commission (NDRC) railway meeting, China’s Premier Li Keqiang stated that the nation will speed up railway construction, with a focus on the central and western parts of the country. China recently raised its 2013 railway construction budget to Rmb 690 billion, and also raised the 12th Five-Year-Plan rail spending to Rmb 3.3 trillion from Rmb 2.8 trillion. This is part of the targeted stimulus plan to maintain the GDP growth floor at 7.5 percent for 2013, and 7 percent for the foreseeable future.
- China’s Ministry of Industry and Information (MIIT) submitted a plan to the State Council to cut overcapacity in 19 industrial sectors including cement, steel, copper, and shipping industries. It is reported that a plan to develop China’s energy saving, environmental protection industry also was submitted to the State Council for approval. Additionally, it was reported that China is planning to invest Rmb 1.7 trillion in air pollution reduction. China seems to be making progress in transforming its economy. The country also will enact tax reductions for small private companies, estimated to number more than 6 million.
- Korea’s GDP growth in the second quarter of 2013 came in at 2.3 percent, which is higher than the market expectation.
- Fiscal revenue in the Philippines grew 13.7 percent in June and gained 10.3 percent for the first half of the year. The country achieved a fiscal surplus of 8.5 billion Philippine pesos, versus the 10.8 billion Philippine pesos deficit. This it is not necessarily good news since the government is expected to spend the money as budgeted. Primary fiscal expenditures grew 12.3 percent in June and gained 13.7 percent for the first half of the year. This week the government proposed an infrastructure spending increase of 29.2 percent for 2014. Finally, the Philippines kept the policy rate unchanged at 3.5 percent.
Weaknesses
- According to HSBC, positioning data for June shows that global equity funds reduced their weight in emerging markets from 8.8 percent in May to 7.9 percent in June. These are the lowest weights since October 2009. All sectors had negative flows during the month of June, which in turn pushed three-month averages into negative territory. It is worth mentioning that higher-frequency fund flow data that is published weekly shows that the pace of outflows from emerging market equity funds collapsed, and even turned slightly positive this week.
- Economists forecasted that Russia’s GDP growth will advance 3 percent from a year earlier during the third quarter, which is down from the 3.1 percent forecast in June’s poll. Furthermore, economists now believe there is a 30 percent chance of a recession next year, up from a 20 percent chance a month ago. The weakness has become evident with investment contracting down 3.7 percent from a year earlier in June. This is the biggest decline since February 2010, with GDP growth slowing to 1.7 percent in the first half of 2013, down from 3.4 percent last year.
- China’s HSBC flash PMI was at a low of 47.7 versus the consensus of 48.5, and 48.2 in June. A manufacturing PMI reading below 50 indicates industrial activities are in contraction territory. Since China’s HSBC flash PMI samples mainly include small to medium export-oriented companies, the lower-than-expected PMI signals weak exports and slower industrial activities in the country. Zhou Xiaochun, the governor of the central bank, the People’s Bank of China (PBOC), wrote in an article published in China Daily that the Chinese economy faces downward pressure. He stated that the central bank needs to maintain stable and flexible monetary policy in order to help stabilize economic growth and transformation.
- Thailand’s manufacturing output contracted 3.5 percent in June versus the expectation for a 2.7 percent contraction. Despite the negative manufacturing surprise, the Thai government estimated that the seasonally-adjusted index grew 1.7 percent month-over-month during the month, breaking two straight intra-month declines.
- In Indonesia, foreign direct investment (FDI) growth slowed to 15 percent year-over-year during the second quarter, down from 23 percent during the first quarter. However, growth for domestic investments was robust at 60 percent, which primarily went to manufacturing rather than coal and mining.
- Taiwan’s June export orders contracted 3.5 percent year-over-year after dropping 0.4 percent in May. In the period of January to June, export orders fell 1.7 percent. Export orders are an indication of potential shipments in the next one to three months.
Opportunities
- The cover of Barron’s magazine this week suggests that Europe's economy has hit bottom and is taking its first steps toward recovery. After almost six years of crisis, economic indicators suggest the worst is over. The European Commission expects the twenty-seven nation European Union (EU) to emerge from recession in the fourth quarter of this year, with economic expansion accelerating to 1.4 percent in 2014. The eurozone, comprising seventeen countries that use the common currency, is projected to expand by 1.2 percent. The current economic environment, prioritizing easy monetary policies, and the scaling back of austerity measures, bode well for a recovery and led to this expansionary projection.
- Mexico’s President Enrique Pena Nieto’s infrastructure plan lays out goals for $320 billion in public and private investment in highways, passenger rail and energy through 2018. At such a pace, infrastructure spending may average 5.3 percent of economic output through 2018. This is a feat the country can afford, taking advantage of its improved debt maturity profile, which boasts the longest duration of any sovereign debt in the continent. Similarly, the plan will boost activity for construction and material companies which have been under pressure this year, as public infrastructure outlays were 21 percent lower than in the same period of 2012, according to UBS.
- As shown in the graph below, China announced a plan to boost installed solar generating capacity for the country by threefold over the next three years. China also will increase investment in air pollution reduction, having already submitted the plan to the State Council for approval.
Threats
- The Reserve Bank of India is tightening banks’ access to cash a week after it increased interest rates, as it employs desperate measures to support the rupee after the currency plunged to a record low earlier this month. The central bank raised the daily balance requirement for the cash reserve ratio to 99 percent from 70 percent, which will be effective July 27. Despite the fact that this policy redesign shows the central bank’s serious resolve to address the rupee weakness, the intensity of the monetary tightening may prove excessive for the market to bear in the short term. This could lead to increased downward pressure for the rupee resulting from equity and bond outflows.
- Corporations are balking at sponsorships for the 2016 Olympics in Brazil, as costs escalate to levels three times as high as previous games, boosting the chances that organizers will ask the government to foot the bill. According to Senator Alvaro Dias of the opposition, the current situation is merely a repeat of the 2014 World Cup, which was supposed to be financed privately and now is 97 percent financed by the taxpayers. The implications of the government having to bail out the organizers will add pressure to President Dilma Rousseff’s efforts to quell unrest by protesters upset with the approximately $15 billion being spent on World Cup-related projects. This comes at a time when the country lacks adequate funding for social investment.
- In Indonesia, it is common that FDI leads local investment. After FDI growth slowed to 15 percent in the second quarter from 23 percent growth in the first quarter, the market is concerned that local investment will also slow in the future.
- China’s Premier Li Keqiang’s speech last week, which was welcomed by the market, provided clarity about the direction of government policy and fiscal actions such as targeted stimulus plans. However, China’s lower-than-expected HSBC flash PMI of 47.7 for July shows the economy still faces downward pressure, and growth is unstable.
