August 24, 2011

SWOT on Emerging Markets (Guest Post)

By Frank Holmes

Strengths
  • In August, Macau gaming revenues tracked at HK$23 billion, up 45 percent on a year-over-year basis.
     
  • China will look to import $8 trillion worth of goods over the next 5 years. For the first 7 months, China bought $973.1 worth of goods from other countries. Chinese imports will bode well for the global economy, particularly Korea and the countries in the Association of Southeast Asian Nations (ASEAN), which run a trade surplus with China. Korea exports 25 percent of its goods to China, while ASEAN exports to China is catching up with that of the U.S., up 25 percent for the first 7 months January through July this year.  
  • Chile’s central bank opted to keep its benchmark interest rate unchanged for a second straight month after consumer prices rose less than expected and economic growth slowed in the second quarter. The highest interest rates in more than two years have helped rein in consumer spending and slow inflation in South America’s fifth-biggest economy, giving policy makers leeway to keep borrowing costs unchanged as they weight the threat posed by slowing global growth.
     
  • Roubini Global Economics speculated that Colombia’s central bank will leave the monetary policy rate at 4.5 percent amid increased risks to growth globally. In Colombia’s central bank’s latest minutes, growth was driven by domestic demand, elevated credit growth, low real rates, improved consumer and business confidence, robust retail sales and high consumer reports. The central bank remains bullish on its economy.
     
  • Peruvian GDP growth will likely increase to 6 percent year-over-year in July, following the deceleration in the construction and manufacturing sectors, although it is supported by the strong retail sector.
     
  • The Istanbul Stock exchange closed in the positive territory after volatile trading for the week, bucking the malaise consuming world markets. Even though initial investor response to last week’s interest rate cut by the Central Bank was negative, the cut now appears perfectly timed to stem the contagion from global slowdown.

Weaknesses

  • In July, Chinese new loans were RMB 492.6 billion, 25.2 billion less than the same period in 2010; M2 went up 14.7 percent, down 1.2 percent month-over-month and 2.9 percent year-over-year. This was consistent with a M2 growth target of 15 percent for the year; RMB total deposit balance at the end of July was 77.97 trillion, down 492.6 billion from the end of June, probably showing the negative effect on deposit due to negative interest rate spread.
     
  • The People’s Bank of China (PBOC) on Tuesday sold a one-year note 8 basis points higher than prior sales, and on Thursday, it sold 3-month note also at 8 basis points higher. The market believes the PBOC will raise interest rates again, but many economists dismissed such speculation because of the adverse global economic environment.
     
  • For the week, Argentina was the worst Latin American performer. The peso is posting its biggest monthly decline in 18 months after President Cristina Fernandez de Kirchner’s 51 percent victory in a primary election, confirming her status as the front-runner before elections in October. Capital flight from South America’s second-biggest economy is also putting additional pressure on the peso to weaken. Individuals and companies took $9.8 billion out of the economy in the first half of this year.
     
  • Volkswagen AG cut production in Brazil as car sales fell. The company cancelled three-days of extra production that would have produced 3,000 cars due to a slowdown in car sales.
     
  • Russian Central Banker Ulyukaev expressed caution about giving additional liquidity to the market, to avoid “unwise spending,” poor quality investments, and “incorrect budget liabilities.” Bank stocks fell in response.
     

Opportunities

  • The month of August was another headwind for China’s banking stocks. The HSCI financial index was down 14.32 percent. Stock prices did not react well to China’s money supply numbers in July: new loans, M2 growth, and bank deposits were all down on a year-over-year basis. However, bank stocks’ valuations are lower than during the 2008 financial crisis. Many in the investment industry believe the cheap valuation is a support for bank stock prices, in addition to higher net interest spread. The table below shows China’s banking industry valuation at historical lows. The chart underneath shows low prices are moving up, which benefits the banks’ profitability.

World Industrial Production Showing Loss of Momentum
  • Year-to-date, Colombia has the best performing currency in Latin America, strengthening 8 percent to 1,776.24 per dollar, compared with the Brazilian real’s 4.6 percent rise and the Peruvian’s sol’s 2.5 percent appreciation. Seeking to break the peso’s rally, Finance Minister Juan Carlos Echeverry said that the government would create an overseas fund with as much as $1.2 billion from dollars bought in the local market, and forgo repatriating funds from abroad for the rest of the year.  According to Bloomberg, Colombian companies are borrowing the most overseas in at least 12 years, taking advantage of the near-zero benchmark interest rate in the U.S. to borrow more cheaply than in Colombia, where the interbank rate is 4.5 percent.
World Industrial Production Showing Loss of Momentum
  • Honda plans to build a new $800 million factory to produce cars for the North American market in Mexico. The plant will employ around 3,200 workers, producing up to 200,000 cars per year.
     
  • While U.S. benchmark crude at Cushing, Oklahoma is now barely above $80 because of excess mid-continent supply, Russian Urals blend still sells well above $100. At current levels, Russian equities seem to be discounting much lower oil prices.

Threats

  • China will extend tightening housing policies to second and third tier cities, which are seeing housing price rise faster than tier one cities this year. The Chinese government is preparing a list of cities that should limit the number of houses that their residents are allowed to purchase. Basically, one family is only permitted to buy one house with 60 percent down payment, among other restrictive measures.
     
  • Venezuelan President Hugo Chavez ordered the central bank to repatriate $11 billion of gold reserves held in developed nations’ institutions in the U.S., the U.K. and Canada.
     
  • Polish Treasury minister said the government may suspend its planned sale of shares in the country’s largest lender in light of recent market conditions. The stake sale was supposed to raise an equivalent of 1 percent of the budget and Treasury will have to issue more debt to make up the gap. Constitutionally, Poland is limited to 55 percent net debt to GDP and the country will be close to that limit in 2011.
About The Author - Frank Holmes is the CEO and Chief Investment Officer of U.S. Global Investors.  (EconMatters author archive here.)

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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