20140314-法国巴黎银行-EM_Strategy_Plus_16页_961kb

EM Strategy Plus Summary

Key Views and Asset Allocation

• China: The law of unintended consequences is evident as tightening policies led to growth collapse, while easing policies caused issues in the shadow banking system. Financial conditions remain tight, and growth is under pressure. We recommend reinstating 5y repo-NDIRS receivers at current levels, targeting 4% with a stop at 4.7%.
• Asia: Buy MYR/THB based on central bank policy differences, seasonality, and yield differentials. Sell USD/TWD puts as the TWD's role as a funder is overblown, with domestic outflows into CNH likely to ease and Taiwan's current account surplus growing.
• CEEMEA Sovereign Credit: Concerns over credit pricing models suggest the need for simpler and more robust valuation methods. Jump risk appears overpriced, while cumulative default probability is underpriced. We recommend further underweighting exposure to Russia and buying 5y Russian CDS, targeting 350bp with a stop at 235bp.
• Venezuela: FX depreciation pressure is expected to persist due to economic and political instability. The new Sicad II system for USD purchases is a positive step, but details remain unclear.
• Russia: We continue to underweight exposure to Russia and recommend switching into shorter maturity bonds. We also suggest buying 5y Russian CDS as a hedge.
• Turkey: The model portfolio remains overweight, but we are switching out of EUR-TURKEY '16 into EUR-TURKEY '17.
• Indonesia: Maintain a modest overweight stance on IDR bonds. The recent rally following political developments is expected to continue with support from foreign inflows and stable inflation.
• Malaysia: The currency is bullish against THB in the near term but bearish over the next 12 months.
• Mexico: We expect a range-bound market due to subdued growth and the fact that much of the positive news has already been priced in.
• Brazil: Maintain a bearish stance on the BRL due to fiscal and external imbalances. We recommend steepening the yield curve, with a focus on the Jan'21 x Jan'15 spread.

Trade Review

• Brazil: Steepening trade on BRL DI Jan'15/Jan'17 reached its target of +23bp, resulting in a profit of +230k USD. Other trades are still in progress.
• CEEMEA: We were stopped out of TRYMXN and 10y TURKGB due to global volatility and local political unrest.
• New Trades:
  1. Buy 1m MYR/THB via NDFs.
  2. Buy 1m USD/TWD ATMF put.
  3. Receive 5y CNY repo-NDIRS.

Key Trade Recommendations

Additional Notes

• The PBoC's liquidity measures have not translated into improved financial conditions for the real economy, as credit and shadow banking remain constrained.
• The seven-day repo rate has fallen to new lows, indicating a shift in market perception. We expect it to range from 2.5% to 3.5%.
• Swaps have repriced significantly, with the one-year swap down 125bp and the five-year down 100bp in three months.
• USDCNY forwards have repriced higher, suggesting that the market is pricing in a weaker RMB. We expect the fixings to creep up to 6.15, but the PBoC is likely to remain cautious.
• China's real lending rate remains high, and the depreciation of the RMB may impact FX loans.
• The default probability for Chinese corporate bonds and trust loans is high, with a focus on sub-investment-grade debt.
• The solvency of Chinese companies is a growing concern, especially with the reliance on CNH for financing.
• The sudden halt in commodity financing may lead to more defaults, especially in sectors with overcapacity.

Conclusions

• The market is expected to bounce back slightly after the Crimea referendum, but the recovery may be limited.
• The PBoC is likely to keep policy easier for longer, given the weak growth and the need to support the economy.
• The focus will remain on the 5y repo-NDIRS trade, with a target of 4% and a stop at 4.7%.
• The carry on 5y repo-NDIRS is +2bp per month.
• The solvency and rollover risk of Chinese corporate bonds and trust loans are significant, with a potential for more defaults.
• The law of unintended consequences is a key theme, with Chinese policy affecting market outcomes in unexpected ways.
• FX volatility and liquidity conditions remain key factors influencing the market.