Emerging Markets Radar (October 14, 2013)
- Indian automakers and consumer companies rose this week following the government’s announcement that state-run banks will increase lending to selected industries. Similarly, the central bank lowered one of its target rates, easing liquidity curbs imposed in July after the rupee rebounded from a record low. Towards the end of the week, data showed that the nation’s trade gap narrowed to the lowest level in 30 months, helping the rupee advance. The Asian nation’s currency has appreciated more than 10 percent from its September low.
- Polish banks rose to the highest level in almost six years after Moody’s Investors Service raised the outlook for the local banking industry to stable from negative. According to Moody’s, the upgrade comes on the expectation that the recovery in economic growth will bring about a recovery in interest income, Polish banks’ main revenue source, and consequent stabilization in bank profitability.
- The number of mainland Chinese visitors to Macau grew 11 percent during the six-day Golden Week holiday, beginning in early October. Gross gaming revenue was up a record 35 percent.
- Over the Golden Week holiday, Chinese travel to Hong Kong was up 17 percent year-over-year, while up 51 percent to North America. Chinese visitors to Thailand, South Korea and Japan were also up on a year-over-year basis.
- New home sales rose 72 percent during the first week of October, the Golden Week, throughout the major cities in China.
- China’s Securities Regulatory Commission is drafting an implementation plan for A-shares companies to issue preferred stocks, the Shanghai Securities News reported.
- Indonesia’s foreign reserve rose to $95.7 billion in September from $93 billion in August. The Indonesian stock market was up 6 percent during the week in U.S. dollars, half of which was from rupiah currency appreciation. Bank Indonesia (BI), the central bank, left the policy rate unchanged at 7.25 percent as expected after improving economic statistics was released last week. China said it will continue to support ASEAN financial stability in case of turmoil as it did in the 1997 Asian financial crisis.
- The Philippines’ manufacturing index rose 18.3 percent in August for a fifth straight month of upbeat gains, benefiting from growing business process outsourcing to that country. Exports soared to 20.2 percent in August, while car sales were up 15 percent in September, showing a robust economy.
- The Bank of Korea, the central bank, left the policy rate unchanged at 2.5 percent this week and kept its view that the global economy is continuing to recover, along with slight signs of recovery within China.
- Turkey’s industrial output dropped surprisingly in August for the first time this year. A Bloomberg analyst survey deemed output was expected to rise 4.1 percent, but the actual reading unexpectedly fell 4 percent from the previous month on a seasonally-adjusted basis. However, September economic data showed that the purchasing managers’ index (PMI) rose to 54 in September, up from 50.9 in August. Exports also rose 11.1 percent from a year ago, driven by the acceleration in external demand, particularly in the euro area, suggesting a strong rebound in activity last month.
- South African Reserve Bank Deputy Governor Daniel Mminele was quoted saying the weaker rand will limit efforts aimed at narrowing the current account deficit because of the inelasticity of imports needed to sustain the country’s infrastructure investment. On a similar note, central bank Governor Gill Marcus said South Africa’s foreign reserves are low in comparison to its emerging market peers, leaving the nation’s economy highly vulnerable to sudden large outflows of capital.
- September exports in Taiwan fell 7 percent versus the market consensus of a 1.2 percent drop. Exports to Europe were up 4 percent on a year-over-year basis. Exports to Japan, the ASEAN nations, the U.S., China and Hong Kong were down 10.9, 9.9, 8.5 and 8.4 percent, respectively. Tech and non-tech exports were also down.
- Total container throughput growth in China’s top eight container ports slowed to 1.5 percent in September after good July and August data, signaling weaker trade volume.
- China’s National Development and Reform Commission (NDRC) announced on-grid tariff cuts averaging 3.1percent for PRC coal-fired power plants, effective September 25, 2013. The announcement removed an overhang on IPP stock prices which had priced in the cuts since the news broke out during the summer.
- Hong Kong Exchanges & Clearing (HKEx) raised the discount, or “haircut,” from 1 percent to 3 percent for some Treasuries for margin cover requirements. This was done because of a possible default by the United States.
- Janet Yellen’s nomination to head the U.S. Federal Reserve is offering emerging markets an opportunity to narrow current account gaps before a reduction of Fed stimulus roils markets and capital flows. The news of the nomination was quickly welcomed by a large number of emerging market central bank heads and policy makers. A deputy Indonesia central bank chief described Yellen as the right pick for local and global financial markets, while she was also described as a well experienced policy maker with an impressive resume, by a South Korean finance ministry official.
- European recovery has been gaining momentum, as economic confidence in the eurozone increased more than economists forecast in September. However, on a valuation basis, emerging Europe stocks may be more attractive. Stocks in the Czech Republic, Hungary, Poland, Russia and Turkey have, on average, a lower price-to-book ratio and a lower forward price-to-earnings ratio than the largest industrialized nations in the world. Additionally, emerging Europe countries offer higher dividend yields.
- As shown in the chart below, passenger vehicle sales are rising in China. Sports utility vehicle sales are even stronger due to popularity in third and lower tier cities where small business and families prefer more space.
- Brazil’s slow growth and mounting corporate financial leverage may prompt credit rating downgrades over the next 12 months, according to Fitch Ratings. The average total debt-to-earnings before interest, taxes, depreciation and amortization for Brazilian companies now stands at 4.2 times and rising at a rapidly-worrisome pace, according to Fitch. In addition, the International Monetary Fund (IMF) cut Brazil’s 2014 growth forecast from 3.2 percent to 2.5 percent yesterday. The IMF argued that the slowdown in investment, resulting from the central bank’s interest rate hikes, is necessary to contain inflation.
- A recent report by Poland’s financial market regulator KNF, shows that as much as 30 percent of Polish credit unions' loan portfolios, at the end of the first half of 2013, were composed of non-performing loans. The concern comes at a time when legislators have begun to look into the risks and potential liabilities that foreign-currency denominated mortgages could have on banks and borrowers. Foreign denominated mortgages represent 54 percent of Poland’s mortgages. An estimated $16 billion in losses would have to be assumed should they be converted to zloty.
- There is a possibility that the Chinese government can lower the GDP growth target to 7 percent next year, which is regarded as high growth by the government, although lower than the market consensus.