CITI: Here Is What The 21 Hottest Emerging Markets Will Do This Year


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As developed economies flail, emerging economies are expected to continue delivering growth.But even emerging markets growth is expected to ease to 5.3 per cent in 2012, down from 6.1 per cent last year. It is eventually expected to rebound to 5.9 per cent in 2013, according to Citi’s latest Global Emerging Markets Strategist report.

We combed through the report pulled together key talking points for investors and markets on each of the 21 most important emerging economies.

Of the BRICs, Citi is overweight China and Brazil, neutral on Russia and underweight India. While many like Brazil and Taiwan have seen their GDP projections slashed, some like Russia, Thailand and Colombia have seen large upward revisions.

Note: Real GDP, inflation, and population forecasts are for 2012.

Brazil's biggest risk is inflation, but it is Citi's preferred market in Latin America

Real GDP growth: 3.3%

Inflation (CPI): 5.5%

Population: 197.0 million

Brazil is Citi's preferred market in Latin America and the biggest risk to the country aside from a Chinese hard landing or a break-up of the euro area is inflation.

Local investors are concerned that the central bank will have to hike rates aggressively in 2013, while foreign investors are concerned about caps on currency gains.

Citi analysts prefer financial and telecom stocks in Brazil since they are less likely to be impacted by the country's increasingly interventionist government, than energy and materials stocks. Citi is overweight Brazil.

Source: Citi

Chile is expected to gain from government spending but inflation is expected to be a risk

Real GDP growth: 4.2%

Inflation (CPI): 3.8%

Population: 17.3 million

Chile's president Sebastian Pinera is pushing for additional government spending this year which is positive for the country's domestic growth story. But improvement in president Pinera's approval ratings have stalled and tax reforms are expected to add uncertainty in coming weeks, while inflation continues to be a risk to the Chilean economy.

According to Citi analyst Jason Press, 'Traditionally a safe haven, Chile has not been performing like it 'should', outperforming in the rally and before that underperforming in a down market in 2011.' Citi is neutral on Chile.

Source: Citi

China faces economic slowdown as delayed policy easing carries over into the second quarter

Real GDP growth: 8.4%

Inflation (CPI): 3.3%

Population: 1.353 billion

The first quarter saw markets turn pessimistic about Chinese growth because of weaker than expected macro data, slower than expected policy easing and after the National People's Congress (NPC) remained cautious on the fiscal front and on easing property curbs.

Delayed policy easing raises the risk that economic slowdown could carry over into Q2. Citi analysts expect policy easing through RRR cuts, an interest rate cut is unlikely unless inflation drops to below 3 per cent. Citi is overweight China.

Source: Citi

Colombia's free trade agreements could harm its domestic sector and investors are concerned about the president's ability to keep the country safe

Real GDP growth: 5.1%

Inflation (CPI): 3.7%

Population: 46.5 million

Investors are concerned about president Juan Manuel Santos' ability to keep the country safe after former-President Alvaro Uribe's crackdown on crime and drug trade.

A free trade agreement (FTA) with the U.S, and Colombia's FTA with South Korea are expected to be harm its industrial sector.

In the long term there are opportunities in Colombia's strong consumer base and its ongoing discoveries of key commodities. Citi analysts are underweight Colombia.

Source: Citi

The Czech Republic is the only emerging market on this list which is expected to see its economy contract

Real GDP growth: -0.4%

Inflation (CPI): 3.4%

Population: 10.6 million

Czech Republic's economy is expected to contract modestly this year hit by weak domestic demand even if export activity stays strong. The government is committed to fiscal consolidation but has yet to finalise austerity measures.

Citi is underweight the Czech Republic.

Source: Citi

Egypt faces a difficult year of political and economic adjustment

Real GDP growth: 3.0%

Inflation (CPI): 12.1%

Population: 84.0 million

With presidential elections scheduled for June politics will remain centre stage in the near term. 2012 is expected to be year of difficult political and economic adjustment for Egypt.

The biggest economic issues for the government include financing the widening current account deficit, curbing inflation and maintaining a stable exchange rate. 'The stock market has bounced sharply in early 2012 and rerated in the process, but is still looking attractive on a relative basis.' Citi is neutral Egypt.

Source: Citi

Hungary's economy is not expected to grow this year because of spill-over from Europe and home-grown problems

Real GDP growth: 0.0%

Inflation (CPI): 5.6%

Population: 9.9 million

Hungary's economy is expected to stall this year and deleveraging is a major concern since consumers have built up high mortgage debt that is often denominated in foreign currency. Hungary faces a combination of spill-over effects from the European crisis and home-grown economic problems.

The country's outlook is challenging following domestic regulatory and political risks, downgrades by S&P and Moody's and lack of clarity on cooperation with the IMF. There are serious challenges to the banking sector from bank deleveraging. Citi is underweight Hungary.

Source: Citi

India faces high inflation risk due to high oil prices

Real GDP growth: 7.0%

Inflation (CPI): 7.0%

Population: 1.224 billion

Indian stock market has been boosted this year by improved liquidity and room for monetary easing is better than in the rest of Asia since Indian policy tightened aggressively in 2011. But high oil prices and the subsequent inflation risk have brought into question the extent of monetary easing Citi is underweight India.

Source: Citi

Indonesia growth will benefit from strong domestic fundamentals, despite high fuel prices

Real GDP growth: 6.2%

Inflation (CPI): 5.8%

Population: 243.5 million

The coming fuel price hike is expected to pose a risk to inflation and policy makers. Higher fuel prices are expected to only have a mild impact on growth since domestic fundamentals are solid, and budgetary stimulus could act as a counterbalance. Citi is underweight Indonesia.

Source: Citi

Korea's construction sector is expected to gain from an election year

Real GDP growth: 3.7%

Inflation (CPI): 3.3%

Population: 50.0 million

The construction sector is expected to benefit from elections this year. Meanwhile foreign buying of equities had been strong at the start of the year but has slowed after the LTRO hype faded and markets again turned their focus to earnings reports. Citi is overweight Korea.

Source: Citi

Malaysia benefits from domestic demand, and markets are focused on election news

Real GDP growth: 5.0%

Inflation (CPI): 2.5%

Population: 30.0 million

Despite a slowdown in exports, Malaysia's domestic demand is holding up. Markets are now focused on election news and policy actions and the country is likely looking at elections in early June. Citi is underweight Malaysia.

Source: Citi

Mexico will benefit from the improving U.S. economic outlook, which could however be a short term disappointment

Real GDP growth: 3.3%

Inflation (CPI): 4.1%

Population: 115.1 million

The Mexican market outperformed in March because of an improving U.S. economic outlook. Citi's Tobias Levkovich thinks the raging bull thesis benefits Mexico in the long run but says it could be a disappointment in the short-run.

Moreover in an election year, the outlook on reforms is unclear. And structural reforms while a positive in the long-term are expected to be disruptive in the near-term. Citi is underweight Mexico.

Source: Citi

Morocco is a historically defensive market but its recent equity performance has been weak

Real GDP growth: 3.2%

Inflation (CPI): 2.0%

Population: 32.4 million

Morocco was the North African country least destabilized by the unrest of the Arab Spring. The monarchy introduced targeted political reforms and boosted investment spending, subsidies and public sector pay while also trying to boost job growth.

But Morocco's equity market made modest gains and was the worst performer within the Global Emerging Markets (GEM) in the first quarter. Citi is underweight on Morocco.

Source: Citi

Peru's mining sector continues to be threatened by protestors

Real GDP growth: 5.5%

Inflation (CPI): 3.5%

Population: 29.7 million

Political risk in Peru has diminished since president Ollanta Humala's business-friendly plans include privatizing the energy and utility sector. GDP growth is resilient.

'One concern for the mining sector is that talks with local protesters continue, which is a reason for preferring domestic stocks, alongside our analysts' belief that commodity prices and Materials margins are in structural decline'. Citi is overweight Peru within GEMs and Latin America.

Source: Citi

Philippines' future outperformance will likely be limited because of it's stretched valuations

Real GDP growth: 4.0%

Inflation (CPI): 3.5%

Population: 97.8 million

Philippines' growth outlook has improved on the back of easing jobless rate, and fiscal stimulus spending.

While foreign investing continued into the start of 2012, foreigners became net sellers of equities in March because of country's outperformance drove up valuations. Citi is underweight the Philippines.

Source: Citi

Poland's growth in 2012-2013 is expected to be below potential

Real GDP growth: 2.7%

Inflation (CPI): 3.8%

Population: 38.2 million

Poland saw strong investment growth last year, though household consumption continues to stay soft. GDP growth in 2012-2013 is expected to be below potential. The zloty could face pressure later in the year. Citi analysts expect earnings to contract this year and they prefer sectors and stocks with defensive features. Citi is overweight Poland.

Source: Citi

Russia's GDP should benefit from high oil prices

Real GDP growth: 3.5%

Inflation (CPI): 5.5%

Population: 142.7 million

Vladimir Putin has returned as president at a time when oil prices are high, which would help GDP expand faster than expected. But the Russian story relies to much on oil prices.

The Russian equity market is the cheapest among the GEMs though the dominant oil and gas sector looks less attractive given uncertainties with tax policy. Citi is neutral Russia.

Source: Citi

South Africa's resources are less likely to be nationalized and investors are looking to it as an entry point to the region

Real GDP growth: 2.9%

Inflation (CPI): 6.0%

Population: 51.1 million

South Africa is expected to see GDP growth of between three to four per cent in 2012-2013. The debate about nationalizing resources is dying down as the ruling African National Congress (ANC) is reining in those in favour of nationalizing the mining sector.

Investors also look to South Africa to be an entry point to frontier markets in the continent. Citi is overweight South Africa.

Source: Citi

Taiwan's GDP growth is expected to pick up in the second half of the year

Real GDP growth: 3.7%

Inflation (CPI): 1.7%

Population: 23.2 million

On the back of the liquidity rally driven by the LTRO in Europe, foreigners bought Taiwanese equities in the first quarter, but this buying began to decelerate at the end of the first quarter. GDP growth is expected to bottom in Q1 2012 and is expected to improve in the second half of the year.

'Removing the political overhang after the ruling KMT won the presidential election should accelerate cross-strait development, providing some protection for downside risks to growth.'Citi is neutral Taiwan.

Source: Citi

Thailand's policy on stimulus could be undermined by elevated oil prices and high deficits

Real GDP growth: 3.8%

Inflation (CPI): 2.9%

Population: 64.6 million

Thailand was the best performing Asian market in the first quarter. Rising oil prices and a deficit risk could hinder policy stimulus to support growth.

Citi analysts expect manufacturing and improving consumption to lead the recovery. Citi is neutral Thailand.

Source: Citi

Turkey's GDP growth is expected to plummet to 2.5% this year, following 8.5% growth last year

Real GDP growth: 2.5%

Inflation (CPI): 9.5%

Population: 74.3 million

A wide current account deficit and high inflation cloud Turkey's outlook. GDP is expected to fall from 8.5 per cent last year to 2.5 per cent in 2012. Turkey is vulnerable to sudden shifts in investor sentiment.

Citi analysts are wary of banks because of the macro challenges the country faces is selective with industrial stocks. Citi is underweight Turkey.

Source: Citi

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