Emerging Markets Cheat Sheet (July 25, 2011)
Strengths
- The Chinese government set up an Affordable Housing Work Group, headed by Deputy Premier Li Keqiang, to supervise local governments to make sure that 10 million units of affordable houses are built this year. Along with administrative supervision, the government will help finance the cause.
- Russia’s unemployment rate fell to 6.1 percent in June, the lowest level since 2008, and real wages advanced 4.2 percent. Retail sales grew for the 18th month in a row, rising by 5.6 percent from a year earlier.
Weaknesses
- The HSBC Flash China PMI for the month of July was at 48.9, versus 50.1 in June. When China’s official July PMI is announced on August 9, we expect it to be much lower than June’s reading of 50.9.
- Taiwan’s export orders increased 9.2 percent in June, lower than the growth rate of 11.5 percent in May.
- Shenzhen and other Chinese cities are reportedly preparing to cap housing prices after the central government started preparing a list of second- and third-tier cities for which tightening housing policies will be applied.
- Poland’s industrial output slowed in June to the lowest growth rate in 20 months, supporting central bank forecasts that the economy will lose steam in the second half of the year.
- Turkish equities sold off after Fitch said an upgrade to investment grade is uncertain due to current account deficit concerns.
Opportunities
- Indonesia’s manufacturing production accelerated in May, and expanded 9.1 percent on the year. The chart below shows that the manufacturing production in Indonesia consistently outperformed Southeast Asian peer countries since 2007. A significant part of the production growth is driven by domestic demand and consumer consumption.
Threats
The HSBC Flash China PMI dropped by 1.2 percentage points to 48.9 in July. This is the first time it fell below 50 since July 2010. PMI indicates industrial manufacturing activities are in expansion mode if PMI is above 50. A reading of 50 or below indicates the country is in contraction mode. It is worth noting that HSBC PMI is a leading indicator for China’s official PMI that will be announced early next month. We can predict that the official PMI has a high probability of falling below 50 for the month of July. The declining trend of PMI is a direct result from the Chinese government’s tightening monetary policy, which will be continued until there is a clear sign that China’s inflation is completely in control.
