Emerging Markets Diary (July 26, 2010

Emerging Markets Diary (July 26, 2010)

Strengths

• Taiwan’s unemployment rate dropped to 5.2 percent, the tenth consecutive monthly decline thanks to a continued strong recovery in exports.
• Thailand’s exports in June surprised on the upside with a 46 percent year-over-year growth and a 4 percent month-over-month, lending resiliency to its economy despite political turmoil.
• China is planning to spend 5 trillion renminbi through 2020 to promote its alternative energy industry, which may add 1.5 trillion renminbi in industrial production to the nation’s economy and create 15 million jobs annually.
• Chinese airline passenger traffic rose 23.2 percent from a year ago in June to 21.8 million, the fastest pace since August 2009.
• Turkish banks’ year-to-date loan growth was 15 percent, according to the banks’ regulator. The growth was driven by mortgages (up 16 percent) and general consumer loans (up 19 percent). Non-performing loans have declined by 4 percent so far this year, easing the cost of risk and boosting profits, another positive trend.

• The improvement in relations between Russia and the United States is reflected in a marked pick-up in bilateral trade. U.S. trade in goods with Russia through the first four months of the year rose by 27.4 percent, to $8.48 billion, according to the Commerce Department.

Weaknesses

• Chinese car dealers have shown signs of weakening pricing power and introduced incentives to promote sales. Average selling prices of locally made passenger cars in China declined by 2.08 percent year-over-year in June.
• The Russian gas extraction tax is set to increase 10-15 percent next year, reports Russian newspaper Vedomosti. Based on the Finance and the Economy Ministries’ proposals, this could increase the bill to $5.3-$6.6 billion next year from $2.9 billion this year.

Opportunities

• A major contributor to weak performance of Chinese domestic stocks so far this year has been massive initial public offerings (IPOs), which divert liquidity away from the secondary market. In fact, equity capital raised in China’s domestic market over the last 12 months is approaching the 2007 peak, according to BCA Research. This is more than twice the U.S. and three times that of developed Europe. Although it may have been of the government’s own accord to expedite IPOs in order to forestall asset bubbles, poor market performance only discourages fundraising activity in the future. With the completion of China’s last mega bank IPO, anticipation of decelerating equity financing going forward may help sustain the ongoing rebound in Chinese stocks.

• Going back to 1990, the average gain for the MSCI Emerging Markets Index in a new bull market has been 57 percent for the first year. The average gain the following year has been a much more modest 9 percent. Citi posits that in the excitement of the first year, equity markets rebound first and stay well ahead of earnings; the following year markets have to wait for earnings to catch up before moving higher.

Threats

• Government policy uncertainty might linger in China before new central leadership officially takes over in 2012, as the incoming and outgoing administrations continue to debate and maneuver for power according to their own visions and agendas for the Chinese economy over the next decade.
• Standard & Poor’s is reviewing Hungary’s credit rating for possible downgrade after the collapse of talks with the International Monetary Fund (IMF). Without an IMF program in place, Hungary is likely to face higher and more volatile funding costs, which could weigh on its financial sector, public finances and economic growth, according to the rating agency.