20161111-法国巴黎银行-EM_Strategy_Plus_36页_2mb

EM Strategy Plus Summary - 11 November 2016

Core Content

The document outlines the implications of the US election results on emerging markets (EM) and provides strategic recommendations for the week of 11 November 2016. It emphasizes the potential for increased USD strength and negative impacts on EM currencies and credit spreads. The focus is on capital flows, FX strategies, interest rate movements, and credit risk assessments.

Main Themes and Views

1. Trumponomics and EM Impact

• The US election outcome is bullish for the USD and negative for EM FX.
• It will lead to steeper bond yield curves in both the US and EM, and higher EM credit spreads.
• Countries with large current account and/or budget deficits will be most affected, especially those reliant on USD inflows.
• The surge in US inflation expectations due to fiscal stimulus is likely to dampen capital flows into EM.
• Break-even inflation rates in the US above 2% are a key concern, as they could push real rates higher and reduce EM inflows.

2. Capital Outflows from China

• Capital outflows in Q3 2016 were close to historical highs, driven by RMB-denominated cross-border flows.
• The CNH market is a key conduit for these outflows.
• To reduce outflows, regulatory curbs or reduction of CNH liquidity via FX forwards may be implemented, which could increase implied interest rates in CNH.
• Capital outflows are worryingly high, with RMB payments now the main source of outflows, while USD payments have declined.

3. FX Strategies

• Buy 1X12 USDCNH: A new recommendation with a target of 2,500 and a stop at 1,000.
• Receive DI Jan25 in Brazil: A new recommendation with a target of 11.36% and a stop at 12.62%.
• Receive 3m forward 1y TRY xccy: A new recommendation with a target of 9.30% and a stop at 10.65%.
• Take profit on USDKRW long and close 2y TWD NDIRS receiver.
• Closed Mexico long UDIBonos due to USD strength and foreign ownership concerns.

4. Interest Rates and Credit Strategies

• Rate hikes are likely in Mexico, especially at the short-end of the yield curve.
• Mexico's credit may be downgraded if external accounts deteriorate.
• Colombia is considered more vulnerable due to a large current account deficit and negative NIIP.
• Brazil is viewed as more resilient, with a positive outlook on its currency and rates.
• Turkey is under pressure, with a recommendation to sell TRY and receive front-end rates.
• South Africa and GCC are also at risk due to large current account deficits and reliance on USD inflows.
• Credit strategies include buying Turkey 5y CDS, selling South Africa 5y CDS, and switching Kenya-Senegal credit positions.

Key Recommendations

Key Countries and Their Outlooks

• Mexico: Likely to see rate hikes, with a risk of credit downgrade if external accounts worsen.
• Colombia: Vulnerable due to large current account deficit and negative NIIP.
• Brazil: Positive outlook, with continued support for its currency and rates.
• Turkey: High risk due to large current account deficit and political uncertainty.
• South Africa and GCC: At risk due to reliance on USD inflows and potential tightening in funding costs.
• China: Capital outflows are expected to continue, with regulatory tightening and reduced CNH liquidity likely.
• India: Bullish outlook due to supportive policies and structural reforms.

Conclusion

The US election results have triggered a shift in global financial dynamics, with increased USD strength and EM FX weakness. The document highlights the importance of monitoring US real rates, break-even inflation rates, and capital outflows from China. It provides a range of strategic recommendations across FX, rates, and credit instruments, with a focus on EM currencies and Latam markets being particularly affected.