Emerging Markets Radar (February 18, 2013)

Emerging Markets Radar (February 18, 2013)

Strengths

• China’s central bank, People’s Bank of China (PBOC), injected $72 billion on February 12 into the system to maintain holiday liquidity through a 14-day reverse repo operation.
• China became the largest trading partner in 2012 after achieving 3 percent more trades than the U.S., the second-largest trading country.
• Lunar New Year data showed visitation to Macau grew 20.8 percent from February 10 to February 13 on a year-over-year basis. The highest growth of Chinese visitors was recorded at 36.5 and 35.8 percent on February 10 (the Lunar New Year) and February 12, respectively. The border checkpoints on the China side were overloaded and it took an hour-and-a-half to pass through during the holiday. The mayor of Zhuhai says that checkpoint expansion will be ready in a few months. Macau is now in a structural growth stage after the Hong Kong and Macau Bridge over the ocean is completed which will shorten the time of travel to about 30 minutes from the Hong Kong airport.
• The policy initiatives of Korea’s new administration will be positive for banks, the property market, construction and steel sectors by focusing on household debt reduction, economic growth, and small and medium enterprise support, according to Morgan Stanley Research Asia/Pacific. Korea may cut policy rates (currently at 2.75 percent) further in the next central bank meeting. The research also believes won appreciation against the Japanese yen is already priced in, and a rebound of the Korean equity market is probably in the cards.
• The Philippines’ December exports grew 16.5 percent, better than the market expectation of 11.5 percent. Non-tech shipments expanded 50.1 percent. Also in the Philippines, the preliminary fiscal deficit of 2.2 percent of GDP for 2012 undershot the government’s fiscal deficit target due to fiscal under-spending in public-private project delays. The same project delays may continue in 2013, which can support the peso and bond spread. On the policy front, the central bank is prescribing tier-one capital of 8.5 percent instead of the planned 10 percent, essentially adopting loosening monetary policy. Bank lending in the Philippines continues to move up as of November last year, up 14 percent year-over-year, while the nonperforming loan ratio continues to soften, hitting at an all-time low of 2 percent.
• Indonesia sustained strong foreign direct investment growth to rise to $4.5 billion, 2.1 percent of GDP, in the fourth quarter, providing funding for the current account deficit.
• Colombia’s second largest Bank, Banco de Bogota, successfully issued $500 million in 10-year bonds at 5.375 percent on Monday. The issue was nine times oversubscribed and rallied to 103.25 on its first day of trading, confirming investors’ appetite for well-managed Latin American debt and equities. The news follows the postponement and scrapping of two planned junk-debt offerings by Brazilian issuers who attributed the decision to weak investor demand.

Weaknesses

• Thailand will raise the cooking gas price by 33 percent in April, which will add 0.2 to 0.3 percent on CPI, according to a JP Morgan estimate. With a minimum wage increase of 40 percent last year, demand will be strong, which will add additional pressure on consumer prices. Although these factors won’t change the dynamics of the economy, the Bank of Thailand may not cut rates in the meeting next Wednesday.
• Indonesia’s current account deficit widened to 3.6 percent of GDP in the fourth quarter last year. Increasing domestic consumption and oil imports may continue to keep the current account deficit near 3 percent of GDP. The Bank of Indonesia left the policy rate unchanged at 5.75 percent in the recent meeting.
• Malaysia’s December exports contracted by 2 percent due to lower crude palm oil and weak electronics production.
• Currency revaluation continues to create hazards for Latin American countries. Peru’s fall in exports and softening construction activity slowed its economic growth to a three-year low in December. Similarly, Brazil’s economy grew a meager 0.9 percent during 2012, a far cry from its BRIC peers (Russia, India, and China).

Opportunities

• The chart above shows that going back 10 years, there’s been a significant increase in Chinese stocks in the month following the week-long Chinese New Year holidays. Based on median returns, the Shanghai Composite Index rises 3.46 percent, while the China H Shares climb 4.32 percent.
• Somewhat unexpectedly, Colombia showed the lowest inflation rate of any Latin American country in January 2013. The news comes after Chile saw a spike in inflation driven by increased copper exports to China. The news grants further room to the Colombian Banco de la Republica to continue its monetary easing program, keep the Colombian peso revaluation in check, and sustain economic growth. A 25 basis point interest rate drop has become highly likely for the Central Bank’s March meeting.
• Global emerging markets’ underperformance relative to the developed markets year to date is largely due to a heavy bias of outperformance of the largest of the developed markets and underperformance in the larger emerging markets. Citi calls for a potential reversal of this theme, buying emerging market laggards and selling developed market outperformers.

Threats

• It seems China’s government doesn’t need a robust housing market to support the economy today, fearing speculation and inflation risks. The rhetoric to curb the housing price was seen rising recently after moderating for a while since the end of 2011 when economic growth was hindered by monetary and housing tightening. Indeed, housing sales and prices are all up, though not alarming, and therefore the risk of further housing tightening is high. Even if further tightening policies may not affect sales, the negative sentiment can put pressure on the stock prices of developers.
• Following last week’s announcement by the Venezuelan government to devalue its currency by 31.7 percent, foreign companies operating in the country are facing a capital loss on any capital repatriation. The new rate of 6.3 bolivars per U.S. dollar still overvalues the bolivar by about 12 percent on purchase power parity terms, adding to a 26 percent inflation rate, indicating the possibility of further currency devaluation in the future.
• 2.7 percent GDP contraction in the fourth quarter in Hungary raises the risk that the Orban government will further reach for unorthodox policy levers as it heads into election season, according to a Standard Bank analyst.