Déjà vu With a Difference in China’s Investment Drive

Thursday, August 2nd, 2012

by Anthony Chan, Asian Sovereign Strategist, AllianceBernstein

Infrastructure investment in China is an important indicator of demand and a key signal of Beijing’s ability to revive the economy. This week, a flurry of news suggested that the rebound in infrastructure investment is gathering momentum.

On Tuesday, the China Securities Journal reported that some commercial banks have asked local branches to provide loans to local government financing vehicles (LGFVs) at the provincial level and in the “top 100 counties”. These loans will focus on projects including highways, railways, gas, clean energy and welfare.

Local governments are competing to pitch mega investment programs. From Nanjing and Ningbo in the east to Guizhou in the south, cities and provinces have unveiled plans for major investment drives. Changsha, a city of 7 million, has launched a massive 830 billion renminbi ($130 billion) investment program, worth 2.5 times the municipality’s annual gross domestic product (GDP). And the Ministry of Railway (MOR) has also announced a 12% rise in investment spending, to 580 billion renminbi for 2012.

In 2009, MOR-led investment was the core of China’s fiscal package, and helped to reflate global demand, particularly in commodities.

China-watchers might be feeling déjà vu. Isn’t this the same investment-led reflation policy that we saw in 2009, which led to a damaging buildup in local government debt?

Not quite. Beijing has been much more cautious this time around. In early 2009, the surge in investment growth was driven by unbridled credit expansion, helping China to power the global recovery while also fueling domestic debt. This time, investment spurred by credit growth is boosting the economy at a more moderate pace.

As shown in the chart below, China’s fixed-asset investment and new project starts indicators have already picked up noticeably in the last two months. All of the recently announced projects are part of the government’s five-year plan, but timetables are being pushed forward and project sizes are being increased while the People’s Bank of China is providing more liquidity. Taken together, these steps aim to protect growth amid rising global uncertainty. We expect China’s GDP growth to stabilize in the third quarter of 2012 at about 7.8% year on year, before rebounding to 8.5% in the fourth quarter as the cumulative effect of fiscal support and monetary policy easing works its way through the economy.

I’m not too concerned about the risks of the investment-led policy, as long as some lessons on funding have been internalized. It would be bad news if local branches of commercial banks provide funds to LGFVs; this would echo the format used in 2009-10, when non-policy banks funded 40% of LGFVs’ investment and increased local government debt levels. Since 2009, many officials and local economists have proposed funding the next round of local investment projects with more private-sector money, corporate and local government bonds or direct fiscal transfers from the central government. If done this way, I think it could create some welcome checks and balances to China’s investment and reflation policy this time around.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio-management teams.

Anthony Chan is Asian Sovereign Strategist—Global Economic Research at AllianceBernstein.

Copyright © AllianceBernstein

Tags: Anthony Chan, Asset Investment, China Securities, Commercial Banks, Credit Expansion, Domestic Debt, Fiscal Package, Global Recovery, Infrastructure Investment, Investment Drive, Investment Growth, Investment Program, Investment Programs, Local Government Financing, Local Governments, Moderate Pace, Provincial Level, South Cities, Sovereign Strategist, Time Investment
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Emerging Markets Radar (July 16, 2012)

Saturday, July 14th, 2012

Emerging Markets Radar (July 16, 2012)

Strengths

• China’s second quarter GDP was up 7.6 percent, in line with the market expectation of 7.7 percent. Asia markets were up after the data release. Fixed asset investment growth accelerated on stronger infrastructure, increasing 20.4 percent year-over-year for the first half of the year versus the forecast of 20 percent. Consumption was stable, rising 13.7 percent in June, slightly down from 13.8 percent in May, but better than the estimated 13.4 percent. Clearly, China is growing at a slower speed, which makes it possible for the government to stimulate with easing monetary and fiscal policies.
• China’s June new loans were RMB 919.8 billion versus the estimate of 880 billion, but short-term lending is still high at about 50 percent. Household lending was 30 percent, which explains why housing sales went up 41 percent in June.
• Korea unexpectedly cut its benchmark interest rate by 25 basis points to 3 percent.
• For the China Region Fund we find that the current market is offering plenty of investment opportunities of growth at a reasonable price (GARP) in the China region. The Fund’s portfolio currently has an average dividend yield of 3.4 percent with average revenue growth at 25 percent.

Weaknesses

• China’s June industrial production was up 9.5 percent, lower than the estimate of 9.8 percent, but just slightly down from 9.6 percent in May. The growth of industrial production was still restrained by enterprises’ destocking and deleveraging, which has negative implication for the economic growth. As a leading indicator to China’s GDP growth, power output is in decline, flat in June, compared to 2.7 percent year-over-year growth in May.

Opportunities

Acceleration in Chinese Bank Lending Should Help Sustain Property Transaction Recovery

• After two interest rate cuts, China housing transactions have increased as home buyers can borrow at lower rate. In the meantime, the People’s Bank of China, the central bank, has encouraged banks to lend to first-time home buyers. The increased new loans in June are a positive sign that new loans are back on an upside trend.

Threats

• Although China’s June economic numbers are showing a steady economic growth, the trend can be on the downside, which makes the market believe the Chinese government will continue to spend to backstop growth weakness.

Tags: Asia Markets, Asset Investment, Bank Of China, Basis Points, Benchmark Interest Rate, China Region, Chinese Bank, Current Market, Dividend Yield, Emerging Markets, Fiscal Policies, Garp, GDP Growth, Housing Sales, Implication, Investment Growth, Investment Opportunities, Leading Indicator, Property Transaction, Quarter Gdp
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China Eases the Way

Sunday, June 10th, 2012

China Eases the Way

By Frank Holmes, CEO and Chief Investment Officer, U.S. Global Investors

Following negative data last week, investors were clearly concerned about global growth and anxiously anticipated government actions. While Europe and the U.S. disappointed investors, China surprised on the upside by cutting interest rates. The market reacted positively, as the S&P 500 Index increased 3.7 percent.

It’s clear the government’s tone in China shifted this week with the rate cuts. The government appeared to be comfortable with slower growth, but that position seemed to change as the country took steps to avert a hard landing and cut interest rates to stabilize the economy.

Over the past decade, there were only two periods when the government reduced rates: once in 2002, and several times at the end of 2008. This time, rates were cut by 25 basis points each on lending and deposits. The one-year benchmark deposit rate is now 3.25 percent and the 1-year lending floor rate is now at 6.31 percent. Historically, easing rates have been positive for the MSCI China Index.

As we often say at U.S. Global Investors, government policy is a precursor to change. While there has been quite a bit of negative news lately, government policy is making a significant step toward growth. We believe now’s not the time to be bearish.

Analysts are only beginning to see signs of increased infrastructure spending, which should help spur growth for the remainder of the year. If you’ll remember in 2011, China deliberately tightened its credit policy to stem inflation and slowed financing to local governments, says J.P. Morgan. As a result, fixed asset investment growth in infrastructure decelerated considerably, and railway investment was completely halted, decreasing nearly 20 percent on a year-over-year basis during the second half of 2011, says J.P. Morgan.

The decline in infrastructure and real estate investment on a year-over-year percentage change is clearly seen in CLSA’s chart, and it’s what Andy Rothman has attributed to slower growth in the world’s second-largest economy:

Highway infrastructure spending “increased sharply” from January through April, particularly in Western China, says J.P. Morgan. The research firm says that the economic growth rates in the Central and Western areas of the country “already outpace those of more developed coastal provinces.” Fixed asset investment for infrastructure, energy development and water projects in the Central and Western regions has grown at a faster clip than in the Eastern region on a year-over-year basis.

Rail infrastructure has also picked up. As of the end of 2011, the Ministry of Railways received a credit line of more than $300 billion from banks, and plans on issuing additional railway bonds, seeking investments by pension funds and encouraging the private sector to invest, says J.P. Morgan.

With fixed asset investment in the rail sector growing 34 percent on a month-over-month basis, this government support is “starting to be translated into action,” says Macquarie Commodities Research. If we see spending in railways continue to increase, China will be able to meet their full-year target, according to Macquarie.

China’s GDP during the second quarter is likely to be about 7.5 percent, and the expectation for 2012 remains at 8 percent. While the country’s GDP is lower than its 2010 high of 12 percent, it is helpful to put this in context with global growth. “Comparatively, it looks like strength—not weakness,” reiterates ISI.

What’s important for investors to realize is that the combination of a ramp up in targeted fiscal spending combined with broad-based monetary easing is a positive dynamic not only for China—but for the global economy as a whole.

John Derrick contributed to this commentary.

Tags: Asset Investment, Basis Points, Benchmark, Chief Investment Officer, China, Clsa, Frank Holmes, Global Growth, Government Actions, Government Policy, inflation, Investment Growth, J P Morgan, Local Governments, Msci China Index, Negative News, Percentage Change, Precursor, Real Estate Investment, Time Rates, U S Global Investors
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Chinese Buyers Defaulting On Commodity Shipments As Prices Plunge

Monday, May 21st, 2012

One can come up with massively complicated explanations for why the Chinese commodity bubble is popping including inventory of various colors, repos, etc, but when all is said and done, the explanation is quite simple, and is reminiscent of what happened in the US with housing back in 2007: everyone was convinced prices would only go up, and underlying assets was pledged as debt collateral at > 100 LTV… and then everything blew up. Precisely the same thing is happening in China right now, where buyers of commodities thought prices could only go up, up, up and instead got a nasty surprise: prices went down. Big. As a result, many are not even waiting for their orders to come in, but are defaulting on orders with shipments en route.

From Reuters: “Chinese buyers are deferring delivery or have defaulted on coal and iron ore deliveries following a drop in prices, traders said, providing more evidence that a slowdown in the world’s second-largest economy is hitting its appetite for commodities. China is the world’s biggest consumer of iron ore, coal and other base metals, but recent data has shown the economy cooling more quickly than expected, with industrial output growth slowing sharply in April and fixed asset investment, a key driver of the economy, hitting its lowest in nearly a decade. “There are a few distressed cargoes but no one is gung-ho enough to take them. Chinese utilities aren’t buying because they have a lot of coal and traders are also afraid of getting burnt. It’s very bearish now,” said a trader. The defaults in thermal coal over the past week has come after a fall in prices over the past 1 1/2 months, with key coal prices indices in Australia, South Africa and Europe all having fallen around $10 a tonne since early April.” And this is the country that over the weekend was rumored to be bailing out the world again? We wonder: will China also bail out FaceBook longs, or will it merely focus on preventing a collapse in its own various commodity bubbles which are starting to pop one after another?

More from Reuters:

At least six defaulted thermal coal cargoes were being re-offered at a discount, traders said, including contracts for shipments from the United States, Colombia and South Africa.

 

“Many of them signed for the spot cargoes in early April and prices have fallen around $10 a tonne since then. Say if the Chinese traders were buying a cape-sized shipment, they’d be suffering a loss of nearly $1.5 million alone,” said a trader at an international firm who has been offered defaulted cargoes.

 

“That doesn’t even take into account the losses on freight rates. So rather than being bankrupted by these deals, they would rather dishonour the contract to survive.”

 

China’s premier called for additional efforts to support growth on Sunday, signalling Beijing’s willingness to take action to bolster its sagging economy.

And if the Chinese commodity appetite is over, that means very bad news for commodity exporters the world over:

Reflecting greater caution, BHP Billiton, the world’s biggest miner, has put the brakes on an $80 billion plan to grow the company’s iron ore, copper and energy operations.

 

Slumping commodity prices and escalating costs have squeezed cash flows, pushing BHP to join rival Rio Tinto reconsidering the pace of their long-term expansion in countries such as Australia and Canada.

For another perspective of just how stuffed to the gills with commodity inventory is we again go to Reuters, which gives us the following scary summary:

When metals warehouses in top consumer China are so full that workers start stockpiling iron ore in granaries and copper in car parks, you know the global economy could be in trouble.

 

At Qingdao Port, home to one of China’s largest iron ore terminals, hundreds of mounds of iron ore, each as tall as a three-storey building, spill over into an area signposted “grains storage” and almost to the street.

 

Further south, some bonded warehouses in Shanghai are using carparks to store swollen copper stockpiles – another unusual phenomenon that bodes ill for global metal prices and raises questions about China’s ability to sustain its economic growth as the rest of the world falters.

 

Commodity markets are used to seeing China’s inventories swell in the first quarter, when manufacturing slows down due to the Lunar New Year holidays, and then gradually decline during the second quarter when industrial activity picks up.

 

This year, however, is different.

 

Copper stocks in Shanghai’s bonded storage, the biggest in China, are now double the 300,000 metric tons (330,693 tons) average of the past four years and iron ore stocks are about a third more than their 74 million metric tons average.

This time may be differernt indeed:

Four years ago, however, the global financial crisis triggered by the collapse of Lehman Brothers broadsided the economy: factories shut down suddenly, millions of workers got laid off, ports ground to a halt. The situation only perked up after the government introduced a $600 billion stimulus scheme.

Probably the biggest difference is that back then Europe wasn’t broke and the US debt/GDP was well below 100%. Both of those are no longer the case.

And to think we were wondering just last week if the biggest construction bubble in history was sustainable.

Tags: Appetite, Asset Investment, Base Metals, Cargoes, Coal Prices, Collateral, Commodities Prices, Commodity Prices, Commodity Shipments, Deliveries, Explanations, Iron Ore, Longs, Nasty Surprise, Plunge, Reuters, Slowdown, Thermal Coal, Tonne
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Looking to China to Fire Up its Economy

Sunday, May 13th, 2012

Looking to China to Fire Up its Economy

By Frank Holmes, CEO and Chief Investment Officer, U.S. Global Investors

Following on the heels of renewed concern over Europe’s debt situation, China released its monthly economic data. Fixed asset investment, industrial production and retail sales all rose in April, yet growth was not as strong as analysts anticipated. “Weak” is the word to describe China’s April figures, says CLSA’s Andy Rothman in his Sinology Report.

While data were lower than expected, they weren’t disastrous, says Andy. According to CEBM Group, slower growth was the government’s intention. China wants the ability to manage a “stable decline” to “promote medium-to-long-term structural reforms” as well as avoid a hard landing, says CEBM.

Because they weren’t devastating results for the country, more fine-tuning, rather than a major stimulus plan, is likely to come from this emerging market if growth continues to stall. “The government should move forward to introduce accommodative policies stabilizing economic growth,” says CEBM.

Easing policy for China is only a matter of willingness. Unlike the developed countries of the West that have overworked their printing presses and are now strapped with a tremendous burden of debt, China is in good shape. According to BCA Research, the country’s overall gross debt is only 42 percent of GDP, significantly lower than all of the G-7 countries which have the most debt of the countries listed below. Of the E-7 countries, only Indonesia and Russia have less government debt compared to GDP.

To offset the country’s liabilities, BCA says China also has “a massive net asset position,” including owning interests in publicly listed firms, large companies and the country’s land mass. According to BCA, if you look at only state-owned enterprises, the net assets are nearly “as large as the total public (local and central combined) debt.” By these stats alone, it appears the emerging country does not have a solvency issue.

However, rather than serious stimulus, CLSA anticipates that China will make a move to ensure its two primary goals are met, which include new loan growth as well as M2-money supply growth of about 14 percent.  Andy says, to accomplish these goals, the government will likely boost its spending on infrastructure and low-income housing, ease restrictions on new home purchases by first-time buyers, and offer more credit to the private sector.

Hear Andy Rothman discuss a hard or soft landing China now

We believe government policy is a precursor to change, and when China feels the need to fire up its fiscal or monetary firepower, we believe the flow of money will send Chinese stocks—along with commodities—higher.

CEBM notes an interesting correlation between the A-Share market and economic growth, which points to a possible improvement. The research firm compares today’s economy with what we saw in late 2008. While the data is not as ominous and the government has grown comfortable with slower growth today, there is still a resemblance to the situation in 2008, where the market rebound led improved economic growth by four months. CEBM believes it may be seeing the same signs of bottoming of the market today, and if the 2008 trend holds, economic growth should now be in the bottoming process.

Fine-Tuning Your Portfolio to Potentially Benefit
As economic data is released over the next few months, China will be keeping a close eye to determine when to open the spigots. Before this happens, we believe investors should position their portfolios to potentially benefit. Here are two ways:

1. Invest in emerging markets companies and commodity equities. Emerging markets continue to offer the most potential for growth, and as you see below, over the past five years, as the Shanghai Composite Index rose, the S&P Global Natural Resources Index soon followed.

2. Get “paid to wait” with dividends. This week, investors fled any asset that was perceived as risky, including stocks of any country and commodities, including gold, in favor of “safe” government Treasuries. The 10-year note on U.S. Treasuries fell to 1.85 percent, which is lower than the dividend yield on numerous stocks. Currently, the annualized dividend rates on the S&P Global Natural Resources, MSCI Emerging Markets and the S&P 500 indices are nearly 2.9 percent, 2.8 percent, and 2.1 percent, respectively, all higher than a 10-year investment. Along with steady income provided by dividends, these stocks offer potential appreciation on your capital.

On May 14, I’ll be presenting at the Hard Assets Conference in New York, sharing more investing insights about China, commodities and how to apply Super S-Curves in a portfolio. I’ll be in good company, as Pam Aden, Adrian Day, Ian McAvity, Jay Taylor and Gregory Weldon will be presenting as well. I hope to share some of their thoughts as well as my takeaways in the coming weeks.

Tags: Asset Investment, Asset Position, Chief Investment Officer, Clsa, Debt Situation, Developed Countries, Economic Data, Emerging Market, Frank Holmes, Good Shape, Government Debt, Gross Debt, Land Mass, Net Assets, Printing Presses, Retail Sales, Rothman, State Owned Enterprises, Stimulus Plan, U S Global Investors
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Emerging Markets Radar (April 16, 2012)

Sunday, April 15th, 2012

Emerging Markets Radar (April 16, 2012)

Strengths

• China’s new loans were RMB 1.01 trillion in March, better than Bloomberg survey of RMB 797.5 billion and amount of new loans in February. In addition, China’s money supply (M2) grew 13.4 percent in March versus an estimate of 13 percent. By the end of March, China’s foreign reserve went up to $3.31 trillion by the end of March; indicating China had reversed the capital flight that began during the fourth quarter of last year.
• A 5.3 percent rise in inbound shipments and 8.9 percent increase in exports from a year earlier created an unexpected trade surplus of $5.35 billion for China, substantially different than the medium projection of a $3.15 billion trade deficit.
• China’s passenger car sales to dealerships rose 4.5 percent in March, exceeding the estimate of 3.9 percent. March retail sales and fixed asset investment also outpaced estimates, rising 15.2 percent and 20.9 percent, respectively.
• China’s Housing Ministry suggested a policy of withholding new home sales permits to developers unless at least 70 percent of their previous projects have been sold out, the National Business Daily says. If it becomes a policy, it should positively impact inventory and may clear the way for new projects.
• Improving electronics shipments drove a 14.6 percent rise in Philippines exports in February, beating estimates.
• South Korea’s workforce increased by 419,000 jobs in March, pushing the country’s unemployment rate down to 3.4 percent. All Asian countries have full employment.
• Turkey’s current account deficit (CAD) narrowed to $75.2 billion for the 12 months ended February 2012. The share of foreign direct investment (FDI) also strengthened.

Weaknesses

• Higher food prices pushed China’s Consumer Price Inflation (CPI) up 3.6 percent (year-over-year) in March, more than the forecast. Meanwhile, the Producer Price Index decreased in-line with expectations. Most market watchers believe China’s food prices will stabilize in the coming months.
• China’s GDP grew 8.1 percent during the first quarter, lower than market expectation of 8.3 percent. The market reacted positively to the number as many believe that it might be the bottom for China’s GDP growth this year.
• GDP growth in Russia had decelerated to 3.9 percent on a year-over-year basis in January 2012, according to Russia’s Ministry of Economic Development. This is down from the estimated 4.9 percent growth in the fourth quarter of 2011.

Opportunity

• China’s new loans were RMB 1.01 trillion in March, better than Bloomberg survey of RMB 797.5 billion and amount of new loans in February. The composition of new loans shows improvement of household long-term borrowing. These are usually mortgage loans, indicating housing market is normalizing. During a visit to Southern China, Premier Wen Jiabao reaffirmed that the government will “fine tune” its economic policy preemptively and the jump in inflation won’t change the government’s direction of monetary policy easing.

Tags: Asian Countries, Asset Investment, Capital Flight, Consumer Price Inflation, Current Account Deficit, Fdi, Food prices, Foreign Direct Investment, Full Employment, Housing Ministry, Inbound Shipments, Inflation Cpi, Money Supply M2, National Business, Passenger Car Sales, Producer Price Index, RMB, South Korea, Trade Surplus, Unemployment Rate
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Emerging Markets Radar (March 12, 2012)

Sunday, March 11th, 2012

Emerging Markets Radar (March 12, 2012)

Strengths

• The Global Emerging Markets Fund (GEMFX) has benefited from a bias toward small-caps in 2012. On a relative basis, the fund has benefited from choosing stocks that pay more than twice the dividend yield of the Russell 2000 Index and those companies which have a low price-to-earnings ratio.
• China’s February Consumer Price Index (CPI) was up 3.2 percent in February, lower than the estimate of 3.5 percent and below January’s 4.5 percent figure. With inflation expectations tamed, the market expects the People’s Bank of China (PBOC) to further cut the reserve requirement ratio (RRR).
• China’s fixed asset investment (FAI) growth came in stronger than expected at 21.5 percent year-over-year during the first two months of 2012, up from 18 percent in December. Interestingly, residential FAI rose 27 percent, the same pace as last year. This indicates that the housing market may not collapse as many worried last year.
• New bank deposits rebounded strongly in February to Rmb 1.6 trillion, enabling Chinese banks to lend more in March. In addition, M2 money supply growth was near expectations, right at 13 percent.
• Philippine CPI rose 2 percent in February. This is well below the 3.2 percent increase that was forecasted.

Weaknesses

• China’s retail sales and industrial production growth came in weaker than expected. Retail sales rose 14.7 percent, down from 17.1 percent in 2011. Industrial production rose 11.4 percent, slowing by 1.4 percentage points from December. These data points indicate that China had probably over tightened its monetary and industrial policies and needs to loosen up these policies during the first half of the year.
• China has lowered the country’s GDP growth target to 7.5 percent this year, 50 basis points lower than in the past eight years. Many believe Chinese policymakers will try to slow down the country’s economic growth by curbing housing market growth and postponing some infrastructure growth. However, China has consistently beaten its own GDP target every year over the last decade and the country will still encourage growth in consumption and industrial enhancement.
• Malaysia’s exports grew 0.4 percent in January, the slowest pace in 15 months.
• After a good run, Turkish industrial production faltered in January. Industrial production was up by 1.5 percent year-over-year in January, weaker than the market expectations. Turkey’s Purchasing Manager’s Index (PMI) also deteriorated in February as a result of poor weather conditions.

Opportunities

• Droughts from Mexico to Argentina are shrinking corn stockpiles to a five-year low. This raises the prospect of a bull market in the U.S., as farmers are expecting to see the biggest crop ever.
• Corn demand in China, the biggest consumer after the U.S., may decline after Premier Wen Jiabao lowered the annual growth target to 7.5 percent. Prices fell 16 percent in the last four months of 2011 as the U.S. Department of Agriculture (USDA) predicted Brazil and Argentina would produce their biggest crops ever. The two countries currently account for almost 10 percent of global corn supply. While prices may keep rising for now, analysts anticipate declines by the end of the year as U.S. growers harvest the most acres planted since 1944.
• This chart shows China’s inflation has come down notably since July 2011. Food prices, the largest contributor to the rise in inflation last year, have come down since the fourth quarter after the supply chain and logistics were improved. The market expects the PBOC to cut RRR again in order to support economic growth and liquidity in the economy.

Threats

• While investment flows pour into most of the largest emerging markets, foreign investors are selling South African equities at the fastest pace in four years over growing concern that policy makers will seek a larger share of the nation’s mining profits. International investors sold $933 million of South African equities in the first two months of this year and are on track for the biggest first-quarter outflow since 2008.
• A study commissioned by President Jacob Zuma’s ruling African National Congress party proposed increasing taxes on the mining industry last month. In addition, the party’s youth wing has lobbied for a government takeover of gold and platinum mines to boost employment in Africa’s biggest economy.
• China’s February retail sales rose 14.7 percent, below the expectations of policymakers. In order to reach the stated consumption growth target near or above 18 percent, Chinese policymakers need to loosen the country’s monetary policy or begin a fiscal subsidy, such as a new home appliance incentive.

Tags: Agriculture, Asset Investment, Bank Deposits, Bank Of China, Chinese Banks, Consumer Price Index, Dividend Yield, emerging markets fund, GDP Growth, Gemfx, Growth Target, Index Cpi, Industrial Policies, Inflation Expectations, Infras, Money Supply Growth, Pboc, Price To Earnings Ratio, Relative Basis, Russell 2000 Index, Small Caps
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Emerging Markets Cheat Sheet (November 14, 2011)

Sunday, November 13th, 2011

Emerging Markets Cheat Sheet (November 14, 2011)

Strengths

• China’s CPI, the main gauge of inflation, rose 5.5 percent year-over-year in October, weakening from September’s 6.1 percent, the National Bureau of Statistics (NBS) said on Wednesday. This will enable the People’s Bank of China to reduce the required reserve rate (RRR) for the banks to allow more loans growth. China’s inflation peaked in July this year.
• China’s October PPI was up 5 percent, lower than the estimated 5.8 percent and September’s 6.5 percent, as slowing global economy dampened material price increase. Fixed asset investment was up 24.9 percent, higher than the estimated 24.8 percent, though in a slow declining trend as China plans to rely less on fixed asset investment to support its GDP growth.

• The Central Bank of Indonesia cut its reference rate by 50 basis points to 6 percent yesterday. This unexpected rate cut followed a 25 basis point rate reduction just a week ago. Bank Indonesia decided to support economic growth as the external economic environment deteriorates as the eurozone debt crisis became worse than expected.
• Turkish industrial production rose 12 percent from a year earlier, according to data published by the government statistics agency, compared with a median forecast of 6.4 in a Bloomberg survey of nine economists.

Weaknesses

• China’s October exports rose 15.9 percent year-over-year versus 17.1 percent in September, and market expectation of 16.1 percent; imports rose 28.7 percent versus 20.9 percent in September and market expectation 22.2 percent; trade surplus was $17 billion in October, higher than September’s $14.5 billion. Trade with Europe weakened, proving the eurozone debt crisis slowed the European economy and demands for China’s goods. Growth of exports to Korea, the Association of Southeast Asian Nations (ASEAN), and Japan also slowed, further pointing to the signs of an Asia slowdown affected by Europe and the U.S.
• China’s October retail sales were up 17.2 percent year-over-year, lower than market estimate of 17.6 percent and September’s 17.7 percent. For the first 10 months, retail sales in China rose 17 percent, which is a strong showing and is fast enough to take China to a consumption-based economy in 3 to 5 years time.
• China’s October passenger car sales rose 1.4 percent on a year-over-year basis after enormous growth last year, according to the Center for Asian American Media (CAAM).
• China’s industrial value-added output grew 13.2 percent year-over-year in October, lower than September’s 13.8 percent, indicating slowing industrial production.

• China’s fixed-asset investment rose 24.9 percent year-over-year in the first 10 months of the year to $3.8 trillion.
• In its monetary policy meeting today, Bank of Korea (BoK) kept the interest rate unchanged at 3.25 percent, but BoK said domestic demand has faltered. Korea’s GDP increased 3.4 percent year-over-year in the third quarter, much lower than the government’s forecast of 4 percent for the year. The major disappointment was in declined capital expenditure investment and inventory destocking, which implied that business sentiment has turned very cautious in the uncertain environment. Consumption growth also slowed down in the third quarter, as a result of weaker consumer confidence.
• China’s broadest measure of money supply, M2, was up 12.9 percent at the end of October from a year earlier, slightly slower than the 13.0 percent rise at the end of September, and below economists’ expectations for 13.1 percent. Chinese financial institutions issued CNY586.8 billion worth of new yuan loans in October, up from CNY470.0 billion in September and above economists’ expectations of CNY500.0 billion, which is expected to rise continuously toward the end of the year.
• Hungary’s inflation rate unexpectedly rose to the highest level in five months in October as fuel and clothing prices jumped.  Consumer prices increased 3.9 percent from a year earlier after a 3.6 percent rise in September, according to the statistics office in Budapest.

Opportunities

• CLSA strategist Francis Cheung compared the MSCI China earnings yield today with those during the Financial Crisis in 2008, SARS in March 2002, the dotcom burst in early 2000, and the Asia Financial Crisis in September 1997. He finds many sectors are trading at 2008 lows, as shown in the graph below. This may indicate Chinese stocks are at the bottom of the current market cycle.

• Exxon recently signed contracts with the Kurdistan Regional Government (KRG) to explore six blocks in the north of Iraq. The move suggests that a compromise is close between KRG and the central government to recognize existing production sharing agreements with other exploration companies already in the region.

Threats

• October’s industrial production and exports in China, and elsewhere in Asia, has started a slowing trend. China’s October PMI also showed slowing export orders. Other indicators such as Canton Fair Order also pointed to slowing growth of both exports and imports. The Bank of Korea has said October domestic consumption faltered in Korea. As the eurozone debt storm gathered pace in Italy, Asian governments have to take measures to support growth. As of today, we only saw Indonesia ease monetary policy by cutting its reference rate.
• The European Union’s energy commissioner Gunther Oettinger has accused Russia of using energy as a political weapon. The commissioner sees the southern corridor route to deliver gas from the Caspian Sea as Europe’s best strategy, calling Gazprom’s South Stream pipeline a “new route for old gas.”

Tags: Asset Investment, Association Of Southeast Asian Nations, Bank Indonesia, Bank Of China, Bank Of Indonesia, Basis Point Rate, Basis Points, Bureau Of Statistics, Debt Crisis, European Economy, External Economic Environment, Fixed Asset, GDP Growth, Global Economy, Material Price, National Bureau Of Statistics, Rrr, Southeast Asian Nations, Statistics Agency, Trade Surplus
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Emerging Markets Cheat Sheet (October 24, 2011)

Saturday, October 22nd, 2011

Kuala Lumpur, Malaysia

Emerging Markets Cheat Sheet (October 24, 2011)

Strengths

• China’s industrial production increased 13.8 percent in September, while the market estimate was 13.4 percent, and August was 13.5 percent. Fixed Asset Investment excluding rural households climbed 24.9 percent, better than market consensus of 24.8 percent in the first nine months of the year, but slower than 25 percent up for the first eight months at the end of August. Property investment for January to September rose 32 percent, from 33.2 percent through August, still showing some strength. Retail sales expanded 17.7 percent, better than the estimate of 17 percent. Chinese consumer spending is the policy focus for growth to adjust China’s GDP weighting more toward consumption.
• China has allowed four provinces and cities to issue local government bonds for the first time. This might be the central government’s first step toward swapping local government bank loans for local government bonds. This would avoid any default of bank loans by the local governments.
• The Bank of Thailand kept its benchmark one-day bond repurchase rate at 3.5 percent. All Asian central banks stopped further monetary tightening in September.
• Growth in consumer-facing sectors in Russia remains robust. Retail sales expanded by 9.2 percent year-over-year in September, and grew by 7.5 percent for the third quarter as a whole.
• Russia, Argentina and Colombia were the three best-performing emerging markets countries for the week in U.S. dollar terms.
• Scotiabank emphasized how “opportune” it is to invest in Asia and Latin America. Canada’s third-biggest bank agreed this week to buy a 51 percent stake in Banco Colpatria Red Multibanca Colpatria SA of Colombia for approximately $1 billion dollars. This is Scotiabank’s largest international takeover, according to Bloomberg. The bank’s strategy is to expand where clients such as property developers and mining companies are doing business.
• Retail sales grew in August for South Africa, accelerating to 7.1 percent, more than the revised 3 percent growth in July.

Weaknesses

• The chair of China’s Bank Regulatory Commission said the risk of mortgage loan defaults is manageable for the banks even if housing prices drop 40 percent. The market interpreted his statement as an indication that China won’t lift housing market controls with falling property prices. In addition, China’s housing ministry may ask local governments to consult the authorities before adjusting real-estate curbs, the China Business Journal reported.
• China foreign direct investment gained 7.9 percent to $9 billion, the slowest pace in three months, as companies pared spending amid global economic concerns.
• Russian industrial production growth in September was lower than in August and only 3.9 percent up from a year earlier, the slowest pace since it began expanding in October 2009, as increasing risks to the global economy weighed on inventory accumulation.
• Asian markets experienced weakness with Taiwan and India being among the bottom three country performers. Turkey led the laggards, down 4.23 percent for the week. Central Bank of Turkey (CBT) loosened liquidity in 2009 – 2010 to support the economy, and tightened it in first half of this year to slow growth. CBT again has been providing liquidity since July of this year, but this week raised overnight interest. This chart from Unicredit shows that the liquidity CBT gives with one week repos and draws with reserves is square at the moment.

• Monetary policy changes in Brazil saw interest rate cuts despite inflation rising to 7.3 percent in September. Brazil’s bank cut rates to 11.5 percent from 12 percent, after increasing them five times this year to combat rising prices. The economic growth forecast for 2011 has been reduced to 3.5 percent as well.
• This week, South Africa’s Competition Appeal Court began hearing a government filed lawsuit to compel regulators to review a decision allowing Wal-Mart Stores Inc. to buy control of Massmart Holdings Inc. Lawyers for the union are claiming that regulators failed to take account of negative effects on the economy or jobs. In June, Wal-Mart, the world’s largest retailer, paid $2 billion for a 51 percent stake in Massmart Holdings Ltd., South Africa’s largest food and general-goods wholesaler.

Opportunities

• Chinese government savings are increasing to above 8 percent of GDP, as shown in the first chart shows. The second chart shows that the Chinese central government holds RMB 3.9 trillion of deposits with the central bank, or 8 percent of GDP. All of this provides the authorities a massive liquidity buffer to deal with an emergency situation.

• The Russian economy may have expanded 4.5 to 5 percent in the third quarter. Having stagnated during the early part of the year, investment has picked up recently and grew to a nine-month high of 8.5 percent in September. Allowing for a recovery in agricultural output following last year’s droughts, economists are raising their forecasts for GDP growth during the quarter.
• HSBC flash Purchasing Managers Index (PMI) numbers for China will be coming out Monday. This will give a preview of China’s strength or weakness of the country’s manufacturing activity.
• French President Nicolas Sarkozy and German Chancellor Angela Merkel will be meeting this weekend for the E.U. and eurozone Twin Summits meeting. The Elysée Palace website highlighted a Franco-German statement depicting the three main focuses of the meeting: the implementation of the eurozone’s bailout fund, a recapitalization plan for European banks, and the implementation of eurozone economic governance and strengthening European integration. The conclusions reached at this meeting will create material effects worldwide.
• In the International Monetary Fund’s latest regional report, Sub-Saharan Africa is expected to show 5 percent growth for the year, and an even more promising 6 percent for 2011.

Threats

• Asian investors became overwhelmed and confused by mixed signals from eurozone officials who are involved in resolving the Greek debt situation. Investors are also concerned with increasing risks that the U.S. may not recover meaningfully for a long time, which can impact exports from Asian countries such as China and Korea. In the last couple of months, Chinese stocks have been bombarded with speculations and reports on a private lending bubble, shadow banking involving Chinese banks, local government loan risks, and a slowing economy. Although many sectors of Hang Seng Composite Index have reached valuations at or below the lows of 2008, there is a risk that investors tend to over-shoot in short term.
• The recent sell off in Emerging Europe’s currencies might lead to a pick-up in inflation and put pressure on policymakers to raise interest rates.
• Concern in Argentina is increasing as the risk of non-payment rises based on the fact that President Cristina Fernandez will continue to draw on a declining amount of central bank reserves to pay debt instead of adopting policies that would give her access to global credit markets. Central bank reserves fell 8.7 percent to $48 billion from $52.6 billion in January as capital flight forced the central bank to sell to curb the peso’s decline. Traders are now forecasting a 44 percent debt default should Fernandez be re-elected, who is a favorite to win elections.

Tags: agricultural, Asian Central Banks, Asset Investment, Banco Colpatria, Bank Loans, Bank Of Thailand, Bonds, Brazil, Canadian Market, Chinese Consumer, Colpatria Red Multibanca, Dollar Terms, First Nine Months, Four Provinces, Government Bonds, India, Kuala Lumpur Malaysia, Local Governments, Market Consensus, mining companies, Multibanca Colpatria, Policy Focus, Property Developers, S Industrial, Scotiabank
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Emerging Markets Cheat Sheet (August 15, 2011)

Monday, August 15th, 2011

Emerging Markets Cheat Sheet (August 15, 2011)

Strengths

• China retail sales in July were up 17.2 percent year-over-year, and 1.26 percent month-over-month. Investors in Hong Kong and the Association of Southeast Asian Nations (ASEAN) stock markets have supported the stock price of consumer stables and luxury goods.
• China’s July industrial production was up 14 percent year-over-year, and 0.9 percent month-over-month, showing China is in a safe soft landing.
• China’s July exports were up 20.4 percent year-over-year, while imports were up 22.9 percent. July’s export numbers broke the monthly export record set in June. In spite of slowing growth in the U.S., Europe, and Japan, China export numbers show some hopeful signs that global trade is still resilient. From January to July, China’s total global trade surplus was $76.2 billion, but China runs a $29.5 billion trade deficit with Japan, and $12 billion with ASEAN countries.
• Korea’s central bank left its benchmark interest rate at 3.25 percent.
• China’s renminbi (RMB) rapidly appreciated during the week. The RMB, for the first time, closed at 6.3898 to the dollar. While a strong RMB is making Chinese consumers and corporations richer, it also helps other countries to sell more to China. Particularly in a world where there is a lack of growth, this will be able to help the U.S. and European countries with their economic recovery. A strong RMB is also positive for commodity producers, Chinese airlines, and Chinese tourism.
• China fixed asset investment grew 25.4 percent from January to July, showing robust activities.
• The Turkish Statistical Institute announced the industrial production indices for June 2011. The industrial production index increased 6.7 percent in June 2011, compared to the same month of 2010.
• Walmart, the world’s largest retailer, is said to be exploring a bid for Carrefour’s Brazil business to help bolster its scale in Latin America.

Weaknesses

• China’s July CPI was 6.5 percent, 0.01 percent higher than in June. Pork alone contributed 1.46 percent to the monthly number. Economists and analysts believe China’s inflation has peaked and expect CPI to come down slowly. This may not force the People’s Bank of China to further tighten the money supply by raising interest rates, but it won’t be enough to make the central bank ease the current policy. However, China’s National Development and Reform Commission (NRDC) said, after the inflation number was released, that China’s inflation is at an inflection point. It further said that China’s economy will be able to make a soft landing.
• China’s auto production and sales in July were up 1.26 percent and 2.18 percent year-over-year, respectively, but were down 6.69 percent and 11.19 percent month-over-month, respectively. Passenger car sales were one million units in the month, up 6.74 percent year-over-year, but down 8.78 percent from June.
• Hong Kong’s second quarter GDP grew 5.1 percent, less than the market estimate of 6 percent. Hong Kong residents are buying gold and houses to protect their wealth under the pressure of the dollar’s weakness.
• The combined outflows from all emerging market funds was $7.8 billion, with total outflows of $14 billion year-to-date. Country-wise, Russia saw the largest redemptions over the last 60 days.

Opportunities

• China tax revenue is increasing as a percentage of GDP and in absolute amount. Normally, higher tax income may not be a good thing for the economy, but this time is different. This huge revenue can provide the Chinese government with the means to handle the economy in case the global economy retreats into recession.
• Poland’s inflation rate unexpectedly fell in July on lower food prices, adding to arguments for the central bank to hold off on tightening monetary policy for the rest of the year.
• Finance ministers from across South America are discussing the creation of a fund to provide the region a safety net and ward off the effects of the global financial crisis, Brazilian Finance Minister Guido Mantega said. Officials are meeting in Buenos Aires to discuss creating a new stability fund or strengthening an existing mechanism, known as the Fondo Latinoamericano de Reservas. The $4 billion FLAR pools foreign currency reserves from five Andean nations plus Costa Rica and Uruguay to help member nations that run into balance of payment problems.

Threats

• Chinese premier Wen JiaBao asked the Ministry of Railway to lower the speed across all the high speed trains. China is now suspending approval for new rail projects. In addition, rumor has it in China that the government will reduce 20 percent of the affordable housing units planned for 2012. These events will affect the demand for building materials, such as steel and cements, and will be a headwind on the sector in the short term.

• Due to the U.S. government debt fiasco and European sovereign debt crisis, the probability for the world to go into a recession has increased. The market, therefore, is reasoning that the global economic environment may make the Chinese central bank think twice before implementing another rate increase, or not increase the rate at all. Should the PBOC go ahead and increase interest rates this month, the market likely will become volatile.
• Ukraine is keen to revise its Russian gas contract, looking for another $100 per cubic meter discount to Russian gas prices, which would bring Ukraine down to levels paid by Belarus. The discount would cost the Russian gas monopoly Gazprom $4 billion by JP Morgan estimates.
• Colombia is “very worried” about the possibility that the U.S. Federal Reserve will start a third round of asset purchases, known as quantitative easing, to boost the economy, Finance Minister Juan Carlos Echeverry said. He is worried that should the Federal Reserve do so, “It could bring another phase of the currency war.”

Tags: Asean Countries, Asset Investment, Association Of Southeast Asian Nations, Benchmark Interest Rate, Brazil, Brazil Business, China Export, Chinese Airlines, Chinese Consumers, Commodity Producers, Export Record, Hopeful Signs, Industrial Production Index, Japan China, Luxury Goods, Production Indices, Robust Activities, S Central, Southeast Asian Nations, Statistical Institute, Walmart
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