Emerging Markets Radar (December 9, 2013)

Emerging Markets Radar (December 9, 2013)

Strengths

• Hungary's third quarter GDP rose 1.8 percent from a year earlier, according to data published by the Central Statistics Office. Similarly, retail sales in the Eastern European country rose 2.5 percent from last year in October, beating analysts’ estimates. The rise in retail sales is a result of improved consumer confidence, low inflation and a hike in some public employment wages. Retail sales could continue to increase as recent utilities price cuts leave households with more disposable income.
• Poland will raise approximately $780 million from the sale of a stake in utility Energa SA, marking Central Europe’s largest initial public offering in two years. The sale will help the government increase revenue from asset sales which, over the last five years, have helped the country gain funds for financing the budget deficit and curbing public debt growth.
• The China Politburo meeting on Tuesday was reportedly to study the economy and to maintain economic stability and implement reform plans. It was heard that the meeting discussed providing supports to the shipping industry. The market is currently waiting for more details on the implementation of reform plans in the upcoming annual Economic Works Conference in mid-December. Also in the week, China announced that it would resume initial public offerings and start preferred shares issuance, which was seen as positive for brokers, insurance companies and banks. China issued three 4G licenses to the three telecom companies in China, which will benefit smart phone makers and e-commerce due to phone switch and faster download time. China’s Ministry of Commerce said that China is implementing 18 free trade zones at the moment. The Ministry of Finance announced on Monday to extend an existing tax exemption on imported LNG and imported pipeline gas effectively immediately to support gas supplies in the winter season. China natural gas consumption is an organic growth opportunity for investors.
• China’s November official PMI was 51.4 versus the estimate of 51.1, indicating the economy maintained expansionary strength.
• Macau gaming revenues were up 21.3 percent year-over-year in November versus the consensus of 18 percent.
• Thailand’s current account deficit was reduced to $0.9 billion in the third quarter, compared with a bigger current account deficit of $6.7 billion in the second quarter. Thailand’s November CPI was 1.92 percent, slightly higher than the consensus of 1.82 percent and October’s 1.46 percent, leaving room for the central bank to maintain an accommodative monetary policy.
• Indonesia managed to produce a trade surplus of $50 million compared to economists’ expectation of a $775 million deficit. Indonesia inflation was also stabilized as November CPI was 8.37 percent versus the consensus of 8.45 percent.

Weaknesses

• The Brazilian economy contracted 0.5 percent in the third quarter, missing analysts’ estimates, in what marked the worst performance since the first quarter of 2009. On a year-over-year period, Brazil’s economic growth slowed to 2.2 percent. The consumer-led growth model of the last decade has proven insufficient to support growth for another decade, in spite of spending incentives by government-subsidized credit. On the other hand, investment contribution to growth is low, at just 19 percent of GDP, as opposed to the emerging-market benchmark of around 25 percent.
• The Czech economy shrank in the third quarter, marking a seventh consecutive contraction. The main detractor was exports which fell before the central bank started a campaign to devalue the currency. GDP declined 1.3 percent from a year earlier. The economy is struggling to return to growth after three years of government austerity and lower demand for Czech exports.
• China will expand a resource tax to coal, according to the National Development and Resource Commission.
• The China Politburo meeting on Tuesday was said to keep property curbs.
• The announcement of IPO resumption in China caused Chinext index, a domestic GEM board, to drop 8.3 percent on Monday as the market was concerned about potential liquidity tightness.
• The Indonesian government will proceed with the plan to ban all mineral ore exports in 2014 in accordance with the new mining law. Although it doesn’t help reduce the current account deficit, it does help the global mineral ore price.
• Korea November exports slowed, rising only 0.2 percent, below the consensus of 3 percent year-over-year increase, on weak exports to Association of Southeast Asian Nations and Japan. Imports were down 0.6 percent versus the consensus for a 4.4 percent increase.

Opportunities

click to enlarge

• In the short term, Turkey will continue to show vulnerability to higher U.S. interest rates due to its large external financing needs; however, the long-term prospects for the economy are among the more favorable in the emerging world. Deutsche Bank strategists believe the Eastern European country is well placed to ascend the rankings of the world’s largest economies over the next 15 years, as shown on the chart above. Aided by a young and growing population, a well-diversified exports sector, and relatively low levels of public and private leverage, the Turkish economy is set to potentially overtake Spain, Canada, and Italy to become the world’s thirteenth largest economy as measured by purchasing power parity.
• India’s stocks outperformed this week as an exit poll showed the opposition Bharatiya Janata Party is set to win four of five state elections held in the past month. The speculation that state election results this weekend will confirm gains for the nation’s main opposition party, and its Prime Minister candidate Narendra Modi, will give Modi momentum ahead of national voting next year. Modi’s popularity stems from his tenure as Chief Minister of Gujarat, where he has overseen annual economic growth of 10 percent on average for his state.

click to enlarge

• As shown in the chart above, Macau gaming revenue growth had rebounded from the recent bottom in July 2012 when the Bo Xilai scandal had caused growth to decline. Analysts expect Macau’s gaming sector to sustain double-digit growth until 2017.

Threats

• Russia’s Economic Ministry officially downgraded the country’s GDP growth rate for 2013 and 2014. According to the Kremlin, economic growth for 2013 is now expected to reach only 1.4 percent, compared to the previous 1.8 percent, and 2014 growth has been cut by 50 basis points to 2.5 percent, significantly below the global economic growth of roughly 3.5 percent. According to JP Morgan analysts, the problem going forward is that state monopolies have been asked to cut annual expenditures by 10 percent through 2018, arguably to preserve the dividend upon which the Russian fiscal budget is reliant. The result of state monopolies cutting annual expenditures is that they would result in lower employment given they are the country’s largest employers, which would in turn result in lower consumer spending, and subsequent hits to GDP.

• Thailand’s political turmoil might aggravate the slowdown of the economic growth should the current government collapse. Also business activities slowed, such as tourism during the protest in November. The market had hoped the King’s birthday celebration would help interrupt the protesters’ enthusiasm.