Emerging Markets Cheat Sheet (July 18, 2011)
Strengths
- China’s second-quarter GDP grew by 9.5 percent compared to a year ago, better than the market consensus of 9.4 percent, and proving China’s success in managing a soft landing.
- China’s June industrial value-added growth was 15.1 percent year-over-year, 1.48 percent better than May, and showing robust industrial production. China fixed asset investment was up 25.6 percent year-over-year (excluding rural houses) for the first half, while real estate development investment was up 33 percent for the same period.
- China retail sales grew 16.8 percent year-over-year for the first half of the year. Retail sales were up 17.7 percent in June, 1.38 percent better than in May. Urban per capita income was up 13.2 percent year-over-year, in the first half, beating inflation by 8 percent.
- China money supply (M2) rose 15.9 percent for the first half of the year, a level that economists call a reversal to the mean. It is also at the government target of 16 percent for the year. In the year-to-date period, social total financing is Rmb 7.76 trillion, 4.6 percent less than that in the same period a year ago.
- South Korea maintained its benchmark rate at 3.25 percent, after raising the rate 25 basis points in June, while Thailand's consumer confidence rose to 72.3 in June from 71.1 in May.
- Brazil’s regulator approved a merger of Perdigao and Sadia to formally form Brasil Foods. We applaud the decision of the Brazilian regulator as the combined company should be one of the leaders of the frozen foods industry able to compete internationally with Tyson Foods and Perdue.
- Retail sales in Brazil in May increased 0.6 percent month-over-month and 6.2 percent year-over-year.
Weaknesses
- The China Government council met after seeing robust house sales in June and increasing prices. The government said it is going to implement a housing tightening policy in second- and third-tier cities to control housing prices from rising.
- Thailand’s central bank raised its benchmark rate by 25 basis points to show the incoming government that it is independent of the government.
- Singapore's second quarter GDP fell an annualized 7.8 percent from the previous quarter as manufacturing slumped.
- Sugar output in Brazil this year (the world’s largest producer) will likely decline by 6.4 percent. The prospect of lower sugar output has been supportive of sugar prices that rose by nearly 40 percent in the last two months.
Opportunities
- Insider buybacks have arrived at H-share companies in Hong Kong. History has shown that the stock prices of those companies usually rise following the buybacks. The chart below by Morgan Stanley demonstrates this positive pattern.
- Sberbank of Russia announced the acquisition of a 51 percent stake in Austria’s Volksbanken, which excludes Romanian operations. The acquisition gives Sberbank entry into eight Eastern European markets, including the Czech Republic, Slovakia, Croatia, and Hungary. The acquisition is part of a strategy to turn Russia’s largest bank into a global bank. Turkey is another potential market for Sberbank’s expansion in the region.
- KBC of Belgium announced its intention to sell its Polish assets, which includes Kredyt Bank and Warta, the insurance company. The proceeds will be used to repay a government loan. KBC announced that it will not proceed with an initial public offering of CSOB in Czech Republic, a competitor of Komercni Banka.
Threats
- Since last April when the Chinese government began its hawkish stand on property price jumps, H-share developers have focused on the opportunity to sell houses in second- and third-tier cities. Developers who sell mainly to those cities are seeing robust sales growth. Now the Chinese government wants to close that market, too. The Government Council met this week to extend housing control policies to those cities, though it is yet to be seen if the government is serious.
- Although a strike lasted just one day in Chile at Codelco, the largest global copper producer with a 12 percent market share, the event illustrates that restructuring of the company (a likely cause of the stoppage) will not be an easy task. The management is aware that the company requires a massive investment program to maintain production levels in light of declining ore grades.
