Emerging Markets Week Ahead: India and Mexico In The Spotlight (VWO, RSX, FXI, EWM, EWW, EPI, ECH)
Joseph Hogue: Emerging market funds recorded a tenth week of inflows last week, the longest run since 2010, as investors put global risk (pronounced eurozone crisis) behind them. Despite the continued inflows, the average emerging market (NYSEArca:VWO) equity portfolio lost 3.1 percent as investors took some profits off the table.
Market sentiment last week closely followed the Greek debt deal and Friday’s non-farm payrolls report. While both turned out to be market friendly, the debt restructuring led a decision by the ISDA that credit-default swaps will be triggered on the collective action clause.
“In Russia, politicians vote for you.”
Russia: Meet the New Boss, Same as the Old Boss Prime Minister Putin won his bid to become a 3rd term president with 63.6% of the votes in the first round. Though protests of election fraud have been voiced, they seem to be fairly weak and the strong economic growth will most likely make any unrest short-lived.
Russian markets rallied after the election, then weakened during the rest of the week on profit-taking and spill-over from eurozone worries. The President inherits the same structural problems that were present during his earlier terms: corruption, weak institutions and monopolies. All these mean little as long as long as the price of brent crude remains above $100 per barrel.
This reliance on oil is both Russia’s (NYSEArca:RSX) weakness and its savior. With geopolitical tensions high and strong emerging market growth, there is little reason to believe that oil will fall below the level where Putin needs to worry about difficult reforms.
Next Week’s Market Movers The year’s second FOMC meeting starts on Tuesday with little new expected of the Fed. The continued high unemployment rate and overall sluggish rate of growth will certainly make its way into comments but the group is likely to shift language to the improving state of the economy. The risk is to a more bullish statement on the economy leading markets to believe that QE3 is less likely, which would have a negative effect on commodities and gold.
China (NYSEArca:FXI) posted its largest trade shortfall since 1989 over the weekend as developed market weakness cut into exports and consumers binged on imports after the Lunar New Year holiday. The rapid decline in economic data is raising odds of further stimulus by the government.
Recent outperformance in India could continue as the central bank meets Thursday to set the repurchase rate. The bank cut the cash reserve ratio by 75 basis points on on Friday allowing the release of Rs 480 bn ($9.6bn) into the banking system. Though consensus was for a cut in the reserve requirement, expectations were for a more modest 50 basis point reduction meaning the excess liquidity in the system could drive further gains this week.
Monday, March 12
Malaysia (NYSEArca:EWM) will most likely report a decrease in industrial production to a 1.0% growth rate from the previous report of 3.0%. The central bank maintained interest rates at 3.0% last week for the fifth straight meeting as rising oil prices threaten inflation.
Indian industrial production likely increased to 2.1% from last month’s 1.8% on continued strength in consumer goods. Capital goods and the mining sector continue to show weakness even as the manufacturing PMI hit an 8-month high of 57.5 in January.
Mobile Telesystems OJSC (MBT) is expected to report earnings per share of $0.41 before market open, well above $0.25 per share reported for the same period last year. The company provides mobile and fixed-line services in Russia and is active domestically and internationally.
Tuesday, March 13
Industrial production in Mexico (NYSEArca:EWW) also likely expanded in January to 3.3% from December’s 2.8% as factory production remains strong and the country benefits from the rebound in the U.S. economy.
VisionChina Media (VISN) reports after market close with expectations for $0.04 per share. The $170 million media company operates an out-of-home advertising network using mobile digital television broadcasts on mass transportation systems in China.
Wednesday, March 14
Producer prices may show a slight increase in India as consensus for the WPI report comes in at 6.69% versus January’s 6.55%. Last month’s reading was the lowest in more than two years and a slight increase would still represent a modest retreat in inflationary pressures.
Thursday, March 15
India’s (NYSEArca:EPI) central bank will meet on Thursday to set the repurchase rate after a cut in the reserve requirement on the previous Friday. Authorities are expected to maintain the repo rate at 8.5% though recent moderation in inflationary pressures puts the risk to a surprise cut in rates. Rates were hiked 13 times between March 2010 and October 2011 slowing growth considerably over the last year.
The Central Bank of Chile (NYSEArca:ECH) also meets on Thursday to decide its nominal overnight rate target. Expectations are for maintaining the 5.0% target. Inflation came in much higher than expected in February with an increase of 0.4% on food and transport costs. Annualized pricing pressures now stand at 4.4%, well above the central bank’s target of 3.0% and putting the risk firmly at a surprise increase in rates.
The February read on Mexican inflationary pressures could shift sentiment for Friday’s rate announcement. Expectations are for a softening in consumer prices to 3.96% from 4.05% in January. Continued upward pressure above 4%, the central bank’s target, could lead to monetary tightening.
Friday, March 16
The Mexican central bank has kept rates at 4.5% since July 2009 and is not expected to change policy on Friday. The bank is extremely reluctant in its policy changes but an appreciation of 8.6% in the peso this year and inflationary pressures above target could eventually lead to a surprise rate hike.
Emerging Money provides insightful and timely information about the increasingly important world of Emerging Market investments. CNBC Emerging Markets Contributor Tim Seymour leads the team of Emerging Money to bring you cutting edge global news and analysis.