Emerging Markets Radar (November 18, 2013)

Emerging Markets Radar (November 18, 2013)


  • Romanian GDP is growing at the fastest pace in two years, with third quarter GDP posting a 4.1 percent increase year-over-year, shattering forecasts of a 3.5 percent expansion. Hungary joined the club of nations that are beating economic growth forecasts with its GDP accelerating to 1.7 percent in the third quarter from a year earlier, more than the 0.8 percent forecast. Poland‚Äôs GDP grew 1.9 percent, also beating estimates. A strong rebound in agricultural production was the main driver behind the sharp pickup in third quarter economic growth.
  • South Africa halved its trade deficit for the first nine months of 2013 after revising the data to include exports and imports from a customs union with neighboring Botswana, Lesotho, Namibia and Swaziland. The trade deficit was lowered to $6.3 billion, helping the South African rand climb about 1 percent to 10.18 against the dollar. The report is relieving to the currency of Africa‚Äôs largest economy, which has come under strain this year falling 17 percent against the dollar.
  • China‚Äôs third plenary session closed this week with a strong declaration to reform the economic and political system in order to transform the structural growth drivers and improve the lives of the people. Although the communiqu√© usually doesn‚Äôt provide detail other than headline statements, the nuances are slowly disclosed which should be positive for the stock market. China Xinghua News reported this morning that China vowed to allow private investments in state sectors and that the one-child policy is changing to a two-child policy, which was not provided in the communiqu√©. The significance of the reform policies is that if implemented, China will move up to another level both economically and socially.
  • China‚Äôs money supply (M2) growth was 14.3 percent in October versus 14.2 percent for consensus and in September. Fixed asset investments grew 19.2 percent, slightly below 20.2 percent in September. Retail sales growth was 13.3 percent versus the market consensus of 13.4 percent and 13.3 percent in September. China‚Äôs October consumer price index (CPI) was 3.2 percent, slightly above 3.1 percent in September, but lower than the market consensus of 3.3 percent. China‚Äôs producer price index (PPI) was down 1.5 percent in October. Industrial production was up 10.3 percent, better than the market consensus of both 10.1 percent and 10.2 percent in September. Exports were up 5.6 percent versus being down 0.3 percent in September, while imports were up 7 percent. The macro data from China showed strong economic growth.
  • Malaysia‚Äôs third quarter GDP was a surprise on the upside at 5.0 percent year-over-year, as net export contribution turns positive. This was above the 4.7 percent consensus. The current account surplus rebounded to 9.8 billion ringgit (RM9.8bn) or 4 percent of GDP versus RM2.6bn and 1.1 percent of GDP for the second quarter. The improvement was led by the widening of the goods surplus to RM25.7bn, with a sharper rebound in exports versus imports. Better domestic demand was reflected in a wider services deficit of RM4.3bn in the third quarter versus RM3.7bn in the prior quarter.
  • Indonesia‚Äôs current account deficit narrowed to $8.4 billion in the third quarter or 3.8 percent of GDP, down from $9.9 billion in the second quarter. Foreign direct investment (FDI) was also relatively strong at $5.4 billion. The country needs continued improvement to lift up the basic balance. This way, Indonesia can arrive at a comfortable level for the currency to stabilize. Bank of Indonesia, the central bank, raised its benchmark rate by 25 basis points (bps) to help defend its currency.
  • The Bank of Korea, the central bank, left the policy rate unchanged as expected at 2.5 percent in November. The central bank cut the rate once this year in May by 25 bps. For the second month, Korea‚Äôs jobless rate stayed at 3 percent in October.
  • The Philippines‚Äô manufacturing index went up 16.2 percent in September. However, this week the Haiyan typhoon was an enormous disaster for lives and property within the area.


  • Renewed concerns about the Federal Reserve quantitative easing (QE) tapering happening sooner rather than later, induced a broad sell-off across emerging market funds and related assets. According to a recent HSBC research report, the stronger U.S. dollar, together with market expectations about a more hawkish outlook on emerging market monetary policy are driving equity investors‚Äô fund flows toward developed markets. As a result, outflows from emerging market equity funds reaccelerated.

Equity Fund Flows: Emerging Markets vs Developed Markets
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  • The economy of the Czech Republic unexpectedly shrank 1.6 percent in the third quarter, reinforcing central bank concerns about deflation that prompted policy makers to start currency interventions. Central Europe‚Äôs economy is struggling to gain traction after a record-long recession, leading the central bank to begin Czech koruna sales to dissuade consumers from deferring purchases and to improve exporters‚Äô competitiveness.
  • In October, China‚Äôs total social financing was Rmb 856.4 billion, down Rmb 574.8 billion in September due to decreases in interbank lending, trust loans and the issuance of wealth management products. New bank loans were Rmb 506.1 billion, down Rmb 280.9 billion month-over-month due to a loan-deposit ratio (LDR) limit and credit quota. China property starts slumped to -3.4 percent year-over-year in October from 41 percent in September. Growth in floor sales slowed to 12.1 percent from 22.8 percent in September, and real estate investment growth also slowed to 15 percent versus 22.3 percent in September.
  • Singapore‚Äôs September retail sales declined 5.9 percent year-over-year versus -7.7 percent in August, which is worse than consensus of -4.4 percent. In real terms, retail sales fell a smaller 3.4 percent.
  • Third quarter GDP in Hong Kong expanded 2.9 percent year-over-year and grew 0.5 percent from the prior quarter. This shows that the economy is slowly growing, although the reading is lower than the market consensus of 3.2 percent.
  • Industrial production in Malaysia was up 1 percent in September, lower than 2.7 percent in August and lower than the market consensus of 2.5 percent.


Valuations in China are Subdued
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  • As shown in the chart above, China stocks, represented here by the MCSI China index, are currently priced at historically low price to earnings (PE) multiples. Industrial companies have seen about 21 percent earnings growth as reported in the third quarter earnings release. Particularly after China‚Äôs third plenary meeting, policy details on reform will be a catalyst for companies that benefit from deregulations and urbanization.
  • Inflation in the eurozone fell further below the ECB‚Äôs target of 2 percent, slowing to an expected 0.7 percent in October from 1.1 percent in September. This decline in inflation allows the ECB greater flexibility to cut interest rates further, following the surprise reduction last week of the benchmark rate to 0.25 percent.
  • Finland, the Nordic eurozone member, is now pegging its trade-led recovery on Russia. The former Soviet nation has once again emerged as a destination for the Nordic nation‚Äôs exports and a source of imports. Finnish exports to Russia have grown 143 percent in the past decade, while direct investments rose eightfold to $4.3 billion, according to the Bank of Finland. The statistics underpin the importance and the growing role of Central European and Eastern European nations in the trade dynamics of developed Europe. They provide a blueprint for smaller nations in the region to profit from better commercial agreements with Western Europe.


  • Indian stocks declined to a five-week low after consumer prices rose to 10.09 percent in October, missing forecasts. Similarly, industrial production grew 2 percent missing estimates of a 3.5 percent increase. The acceleration in inflation adds pressure on India‚Äôs central bank governor Raghuram Rajan to raise interest rates; however, the lackluster economic growth evidenced by the recent industrial production numbers may force the central bank to defer any tightening monetary action going forward.
  • The Indonesian rupiah dropped about 7 percent in the last two weeks versus the U.S. dollar due to continued current account deficit and the prospect of U.S. Federal Reserve tapering next year. In spite of correcting 17 percent from the peak in the year, the Jakarta Composite Index is still at price to earnings (PE) multiples of 18.6x, which may deter investors from embracing the market in the short term.
  • OAO Mechel, Russia‚Äôs largest coking coal producer, sank on the news that it is holding talks with banks about restructuring debt. Mechel, which has delayed publication of its first-half financial report, possibly to avoid a technical default, is one of Russia‚Äôs most indebted mining companies, with net debt of $9.55 billion. The situation could renew speculation on the high levels of corporate leverage in Russian large capitalization stocks, and may result in increases to the required rates of return on Russian corporate debt.
  • Tinkoff Credit Systems TCS, a Russian online banking service platform fell over 40 percent on Friday following a news article which cited a Senator‚Äôs proposal to ban the online sale of credit cards. The issue appears to be the proper identification of customers along with the avoidance of fraud; however, TCS has implemented a system to properly identify the customer by passport upon courier delivery. The theory of analysts is that the policy seeks to protect traditional lenders by preventing credit growth outside conventional channels, as well as acting as a means to curtail retail purchase growth that is keeping inflation above the central bank‚Äôs target rate.
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