Emerging Markets Cheat Sheet (March 21, 2011)

Emerging Markets

Strengths

• The People’s Bank of China (PBoC) published a household survey for the first quarter of 2011 which shows the percentage of households that “expect consumer prices to rise further” dropped significantly to 47.1 percent during the first quarter, down from 61.4 percent in the fourth quarter of 2010. These results may support the view that the sequential CPI inflation has mostly peaked and the risk of an expectation-led inflation spiral has declined.
• Hong Kong unemployment dipped to 3.6 percent in February, the lowest since August 2008.
• In China, companies began reporting earnings for the fourth quarter of 2010 and full-year 2010 a week ago. So far, we have seen excellent revenue and earnings increases across all sectors for the reporting period.
• Grana y Montero, the Peruvian engineering/infrastructure firm, won a $120 million sanitation project and a $78 million mining project for the Yanacocha gold mine.
• Cencosud, a large Chilean retailer, reported stronger-than-expected fourth quarter 2010 results.
• Industrial output growth in Poland accelerated during February to 10.7 percent year-over-year, up from 10.3 percent in January. Car production grew by 2.3 percent from a year earlier.

Weaknesses

• The earthquake and tsunami in Japan have caused concerns of a nuclear crisis at the Fukushima Daiichi facility. Alarmed by the crisis, China and Germany, along with other countries, have started immediate safety inspection programs on their existing nuclear power plants and those under construction. Particularly in China, the government has ordered a temporary suspension of new nuclear project approval until all the safety measures can guarantee a “zero” risk, as was reported by a National Development and Reform Commission (NDRC) official. Globally, uranium and stocks of nuclear power generators and equipment makers were sold off, which many believe was an over reaction. China said it will continue its grand nuclear power development plan, which currently accounts for 40 percent of the world’s nuclear power plants under construction.
• The PBoC raised the bank’s Required Reserve Rate (RRR) this week to 20 and 18 percent for large and small banks, respectively, effective on March 25. It is believed that money supply tightening will continue until China inflation is under control.
• In India, the central bank raised its benchmark interest rate by 25 basis points to curb inflation. This is the eighth time the Indian central bank has hiked rates since early last year.
• The earthquake and its damages may cause Japanese GDP to drop at least 1 percent and disrupt some Japanese industrial supply chains, such as auto parts and high quality steels. Some exporters to Japan will see their sales drop, at least temporarily, due to disruption of Japanese industrial buyers.
• Mexican home builders are facing numerous headwinds and the recently held investor day did not clear many hesitations of investors. The stocks of Homex, Ara and GEO have been major underperformers on the Mexican Bolsa this year.
• Turkish Prime Minister Recep Tayyip Erdogan’s visit to Russia capped a four-week period of spectacular changes to Russian energy transit projects in the Black Sea and beyond. According to the Jamestown Foundation, the Kremlin abandoned the South Stream gas pipeline project, designed to have stretched from the Black Sea into eight European countries.

Opportunities

• After the nuclear crisis and rescue efforts, Japan will soon start to rebuild the country. In the power sector, we believe Japan will use more coal and liquefied natural gas (LNG) to replace the power shortage caused by the nuclear plant closure. Japan will also need to import cement, steel and other materials for reconstruction of destroyed houses and facilities. In high-end industrial materials, such as those used in auto manufacturing, Korean and Chinese manufacturers will replace the Japanese manufacturers’ market share.
• China will further increase its natural gas consumption, as has been planned in its next five-year plan, and build more hydropower dams along inland water networks. After the nuclear crisis, it is easier to argue for solar and wind subsidies; therefore, we may expect continued growth in the sector. News in China reported China’s Energy Department and the Ministry of Industry and Information Technology (MIIT) have finished their draft plan recently for the development of seven new energy industries and have passed it to the State Council for review. The seven industries include wind, solar, nuclear and smart grid. The report also said China is to spend 5 trillion renminbi (yuan) over the next 10 years on these industries.
• Benefiting from high commodities prices, Peru is planning to launch a sovereign wealth fund later this year with capital of $5-$6 billion. The fund would support the development of local capital markets in light of the planned integration of the Peru, Chile and Colombia stock exchanges.
• S&P raised the credit rating of Colombia to investment grade – the recognition shared among Brazil, Mexico, Chile and Peru – which will likely entice even more investors into the country.
• A Stratfor Intelligence report points out that Russia may be the one country that stands to gain from various calamities in 2011. First, the general unrest in the Middle East has increased the price of oil by 18.5 percent. Second, the Libyan unrest has cut off the 11 billion cubic-meter natural gas Greenstream pipeline to Italy, causing Europe’s third largest consumer of natural gas to turn to Russia to make up the difference. Similarly, Japan’s nuclear imbroglio has forced Tokyo to turn to Russian emergency shipments of LNG to fuel its natural gas-burning power plants.

Threats

• Radiation from the Fukushima nuclear facility in Japan can be harmful to people elsewhere globally as it moves across the ocean. This may continue to cause market volatility. Also, a prolonged industrial production disruption in Japan will have a negative effect for global economic recovery, though this is not expected to be significant.
• In China, the market continues to watch for further PBoC tightening, the housing market direction after this year’s new tightening policies, and the inflation trend. Any improvement may indicate China’s success in managing a soft landing.
• The Japanese earthquake may disrupt the supply chain to some Latin auto parts producers, including Alfa in Mexico.
• Concerns over the disaster in Japan are likely to prompt tougher safety standards for nuclear plants around the world. Germany will keep its seven oldest reactors offline as part of a nationwide safety review. As shown in the chart, plants in Eastern Europe were built less than 20 years ago using newer, safer designs.