Emerging Markets Radar (November 12, 2012)
Strengths
- China’s October economic data shows the economy is indeed recovering. October’s Consumer Price Index (CPI) was up 1.7 percent versus the estimate of 1.9 percent; the Producer Price Index (PPI) dropped 2.8 percent, improving from September; industrial production was up 9.6 percent versus the estimate of 9.4 percent; fixed asset investment was up 20.7 percent versus the estimate of 20.6 percent year-to-date in October; retail sales were up 14.5 percent versus the estimate of 14.4 percent. Power generation in October went up 6.4 percent, the highest in the last seven months.
- China’s railway investment in October doubled year-over-year to RMB 70 billion, up 8.6 percent month-over-month. CITIC Security in China expects railway investment will continue to rise in November and December on a year-over-year basis. China has also surpassed its social housing construction target of 5 million units for this year in October.
- Bank Indonesia left policy rate unchanged at 5.75 percent. The balance of payment in the third quarter was a surplus of $834 million, improving from a deficit of $6.9 billion in the second quarter. Third quarter GDP was up 6.2 percent in line with the market expectation, showing strong private consumption growth.
- Malaysia’s October exports were up 2.6 percent, rebounding from negative 4.5 percent in September; imports also surprised on the upside, expanding 9.6 percent in September versus 2.8 percent in August.
- Turkish industrial production exceeded market consensus of 2.2 percent growth in September by a wide margin, posting 6.2 percent growth over last year.
Weaknesses
- Taiwan’s October exports were down 1.9 percent, below market expectation for a positive growth of 2 percent year-over-year and 10.4 percent growth in September.
Opportunities
- The graph shows outperformance of material stocks moved in tandem with power generation. As industrial production improves, demand for materials will likely also improve. Historically, there is a positive correlation between cyclical stocks and power generation.
- Fitch Ratings upgraded Turkey to investment grade; Moody’s has a positive outlook for Turkey and is likely to follow. Investment grade would lower funding costs for Turkey, helping to narrow its current account deficit further.
- Earnings-per-share growth in Emerging Europe has been higher than other developing markets, and market-cap-weighted GDP growth plots above the regression line in a BCA study. Turkey, Central Europe, and to a lesser extent Russia, continue to benefit from rapid technological catch-up with Western Europe.
Threats
- Although China has turned a corner in its economic growth, a flare-up in eurozone debt issues and potential U.S. “fiscal cliff” may slow the recovery unless China adds to its stimulus.
- With increasing wind and solar power construction encouraged by the Chinese government, thermal power capacity expansion is limited in the next few years, which threatens the revenue of power equipment manufacturers in China.
- The LTE auction, which starts next Monday in the Czech Republic, is likely to bring a new entrant to the market, and could have implications for the incumbents.
