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EM STRATEGY DAILY - 21 February 2018 Summary

Core Content

This document provides an overview of the Emerging Markets (EM) strategy and highlights key events and market outlook for the day.

Key Market Events

• FOMC Minutes: The minutes from the 31 January meeting will be in focus. Markets are looking for any indication of further gradual rate hikes, with expectations of 4 hikes this year versus the FOMC forecast of 3.

• South Africa Budget: The Ministry of Finance will present the national budget today. Key points to watch include:

  • Budget deficit path: Expected to narrow from 4.6% of GDP in FY2017/18 to 4.1% by FY2020/21 (-0.4pp).
  • Primary balance projections: Markets are looking to determine when the primary balance will turn positive.
  • Revenue raising areas: Potential for a VAT hike from the current 14%.
  • Financing of state-owned enterprises (SOEs): Challenges in profitability and liquidity are expected.

• South Africa Inflation Data: CPI data is expected to show a slight decline in inflation from 4.7% y/y in December to 4.4% in January. Core inflation is also expected to decrease slightly from 4.2% to 4.1%.

• Turkey Home Sales: January home sales data will be announced. Sales declined by 6.7% y/y in Q4 2017, indicating weakness in the real estate sector. The decline is attributed to higher mortgage rates in the second half of 2017, which led to a drop in prices. Further weakness is expected unless mortgage rates decrease.

• Asia Bond Inclusion: Bloomberg has formally announced the inclusion of IDR denominated Indonesian bonds in its Global Aggregate bond index, effective 1st June 2018. The weight of IDR bonds is expected to be around 0.3%, consistent with market expectations and largely priced in.

• South Korea Trade Data: February import and export data showed a significant drop in exports (-3.9% from 9.2%), while imports decreased slightly to 13.6%.

• Latin America: Non-resident holdings of Mexican public debt remained unchanged at MXN 2.1trn (USD 113.6bn) in January. 75% of holdings in debt with tenors longer than 10 years are held by overseas investors. There is a strong correlation between TIIE 10y yield and non-resident holdings. The strategy includes being long 5y5y TIIE against US 5y5y swap and 5y TIIE against Colombia IBR 5y, as well as Udbono 2019, all hedged with MXN.

Key Contacts

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Additional Notes

• The document includes performance data based on back-testing, which is for illustrative purposes only.
• It may contain information about ETFs, convertibles, and other securities not registered under US securities laws.
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