Emerging Markets: What has Changed

(from my colleagues Dr. Win Thin and Ilan Solot)

1) China IPO has resumed in earnest

2) The Korean government may step in to help exporters

3) Brazilian domestic auto sales declined for the first time in 10 years while Mexico’s auto industry booms

4) Hungary central bank minutes suggest rate cuts to continue this year, but at a slower pace

Over the last week, the top equity performers were Argentina (+1.1%) and Czech (1.0%), while the worst performers were China (-3.9%) and Poland (-2.3%). In FX (vs. USD) INR (+0.3%) and Malaysia (+0.3%) where to top performers, while ZAR (-1.2%) and KRW (-1.2%) underperformed.

1) China IPO has resumed in earnest. The string of new companies coming to market has been one more factor weighing on Chinese stocks. For example, there were two IPOs subscriptions completed today worth RMB1.3 bln, and there are four more scheduled for tomorrow, worth RMB5.5 bln. The Shanghai Composite is the worst performing index amongst major EM markets, already down 4.2% since the start of the year. Some reports suggest that as much as fifty firms could launch IPOs this month and over 700 are in the pipeline for this year. So if the current mood continues, it’s hard to see a large upside for Chinese stocks.

2) The Korean government may step in to help exporters. According to an article in the Seoul Economic Daily, the government has prepared measures to help exporters cope with a weak yen. The steps could include state-run Korea Trade Insurance Corporation reportedly providing as much as KRW1.9 trln ($1.8 bln) to help hedge local exporters’ FX risk. What’s unclear is what this measure may mean for KRW. Will these types of policies replace direct FX intervention or will they complement it? Note that USD/JPY and USD/KRW were highly correlated until August, after which the won started to appreciate rapidly.

3) Brazilian domestic auto sales declined for the first time in 10 years while Mexico’s auto industry booms. Brazil remains the world’s fourth–largest market and the seventh-largest carmaker, but the excitement is gone. The small decline (0.9%) for 2013, reported this week, was most likely related to tighter credit and stagnant growth. In contrast, the Mexican Auto Industry Association has been posting very strong figures, with sales at their highest levels since 2007.

4) Hungary central bank minutes suggest rate cuts to continue this year, but at a slower pace. Two members voted for a 10 bp cut at the December 17 meeting, while the majority voted for 20 bp. However, those voting for 20 bp cut agreed that it may need to slow the pace. Next meeting is January 21, and consensus is for a 10 bp cut to 2.90%. This is getting silly. CPI inflation is expected to ease to 0.4% y/y from 0.9% in November when it is reported January 15. Central bank is doing a bit of balancing act but we think easing continues over the next few months.