Emerging Markets Radar (March 10, 2014)
Strengths
- Poland's economic growth accelerated in the December quarter. Gross domestic product (GDP) increased 2.7 percent on an annual basis in the fourth quarter, from 1.8 percent growth recorded in the third quarter. In addition, the HSBC Poland Manufacturing PMI Index rose to 55.9 last month from 55.4 in January.
- India’s current account deficit narrowed to a four-year low in the fiscal third quarter, aided by a decline in gold imports and a revival of exports. The deficit stood at 0.9 percent of GDP in the three months ending December 31.
- The Philippines’ government budget deficit in 2013 came in at 1.4 percent of GDP, lower than 2 percent targeted and 2.3 percent in 2012, as revenue grew twice-as-fast as spending on a year-over-year basis. The Philippine peso continued to strengthen by 0.76 percent in the last week, trading at the highest level in two months.
Weaknesses
- Brazil’s primary budget surplus narrowed in January, marking a weak start for the government’s effort to boost savings and regain credibility with investors this year. The shrinking primary budget surpluses have widened the country’s overall budget deficit, which includes interest payments to a three-year high of 3.28 percent of GDP.
- Eurozone manufacturing PMI slowed to 53.2 in February from a stronger 54.0 in January, with the German print falling but still staying in growth territory. The overall survey is consistent with the most recent eurozone industrial output growing at 1 percent. The new orders data shows the block is still in expansion, but the pace has weakened from recent months.
- Taiwan’s exports in February contracted by 8.3 percent month-over-month, after adjusting for seasonality and distortions related to Chinese New Year, while imports rose marginally. The trade surplus declined to $1.6 billion in February from $3 billion in January.
Opportunities
- Despite concerns related to current account deficit last year, aggregate foreign direct investment into the five largest Southeast Asian countries rose 7 percent in 2013 to $128.4 billion, overtaking the $117.6 billion into China. Younger demographics, lower labor costs, robust domestic demand, and rising geopolitical competition among superpowers should help sustain favorable investment cycles in Southeast Asia, especially in faster growing countries like the Philippines and Indonesia.
- In spite of the “Black Monday” sell-off in Russia, resulting from speculation of Western sanctions being imposed on the country, some Russian stocks are set to outperform based on strong fundamentals. While familiar Russian companies such as Gazprom and Lukoil are highly exposed to the political tensions in the region, we prefer dynamic, independent, shareholder-driven companies such as Mail.Ru Group, an Internet company focused on social networks and gaming, along with Yandex, the dominant Internet portal in Russia. Both of these companies are removed from the negative sociopolitical perception that triggered Monday’s Russian sell-off.
- The Bank of Greece has released the results of the stress tests on the back of the BlackRock review, showing the Greek banking sector requires an extra 6.4 billion euros in capital. Piraeus Bank announced a 1.75 billion euros financing to shore up its Tier 1 capital ratio, and to repay preferred shares of 750 million euros. The repayment of preferred shares makes sense in the long run, and together with the shoring up of its balance sheet, removes a large overhang for Piraeus Bank. Over the course of the past months, European banks that have come to market to recapitalize and shore up capital positions have largely outperformed those who haven’t.
Threats
- On Thursday, J.P. Morgan downgraded its view of Russia to underweight from overweight, arguing that the biggest economic loser from a protracted standoff between Russia and the west would almost certainly be Russia itself. The crisis erased $58 billion from Russian equities in three days, and with global emerging market funds still a relative overweight in Russia, a continuation of the standoff makes further downside possible.
- Angst over Russian expansionism is spreading across the former Soviet Union, as President Putin held snap military drills in the Baltic Sea, just as Russian troops descended into Ukraine’s Crimean Peninsula. Putin, who labeled the Soviet breakup as the greatest geopolitical catastrophe of the century, has the potential to continue destabilizing the region as he claims that former Soviet states are actively supporting anti-Russian movements in Eastern Europe.
- China’s first onshore corporate bond default this week may potentially raise the specter of more negative credit events, especially from industries ridden with overcapacity and high leverage, as well as any associated ripple effect.
