20160701-法国巴黎银行-EM_Strategy_Plus_28页_3mb

EM Strategy Plus Summary - 1 July 2016

Core Content

This document provides an analysis of emerging market (EM) strategies in the aftermath of the Brexit referendum, focusing on currency, bond, and credit opportunities. It highlights the return of EM markets to pre-referendum levels and emphasizes the divergence in performance among different regions and countries. The analysis suggests that high-yield and strong local fundamentals are key drivers for EM assets, while those with weak fundamentals or strong ties to the EU are less attractive.

Main Themes

• EM Markets Return to Pre-Brexit Levels: After initial weakness following the UK referendum, EM markets have largely recovered, with FX indices flat and USD bonds slightly tighter compared to US Treasuries.
• Divergence Persists: Despite returning to previous levels, significant divergence remains among EM currencies and bonds. High-beta EMs such as Brazil, Argentina, Indonesia, and Russia are performing better, while low-beta EMs like those in the CEE region are underperforming.
• G4 Central Bank Liquidity Supports EM: The availability of global USD liquidity, particularly from the G4 central banks, is a key positive factor for EM assets. This is expected to continue, supporting the current positive trend.
• Fiscal and Monetary Policy Impacts: The document outlines the potential for further capital inflows into EM in July due to negative real rates in the US, and suggests that these inflows could lead to currency appreciation and narrowing USD-EM breakeven spreads.

Key Recommendations

Regional Analysis

Asia

• TWD: The TWD is expected to appreciate due to FX mismatch and capital repatriation. Recommend selling USDTWD NDF at 32.20 with a target of 31.20.
• IDR: The Indonesian rupiah is supported by the tax amnesty bill and high yields. Recommend buying 20y IDR bonds at 7.85% with a target of 7.20%.

CEEMEA

• ZAR: The South African rand is expected to appreciate due to its high dependence on short-term dollar funding. Recommend receiving ZAR 5y5y at 8.90% with a target of 7.85%.
• Poland: Recommend buying 10y Polish government bonds (POLGBs) as capital inflows may lead to rate easing.

Latam

• BRL: The Brazilian real is favored due to its high carry and improving growth prospects. Recommend going long BRL and buying the flattener on the 1s2s5s curve.
• MXN: The Mexican peso is expected to remain stable, with the central bank raising rates in response to FX weakness. Recommend buying 10y MXN swaps.
• COP: The Colombian peso is also seen as a good opportunity due to its high dollar-beta and potential for appreciation.

Key Risks and Underperformers

• China: The economic health of China is a critical risk factor for EM, particularly for Asian currencies. Concerns about the sustainability of Q1 credit growth and weak PMI data could affect EM.
• CEE FX: CEE currencies are likely to be volatile due to strong ties with the EU and potential reductions in EU subsidies. Despite this, they have relatively strong balance of payments.
• Low-Yield EMs: Countries with low interest rates and weak local stories are less attractive, including MXN, CEE FX, and some Asian currencies.

Market Outlook

• Asia: The rally in local markets could stall due to the US June non-farm payrolls report and the Eid holiday. However, continued liquidity support from G4 and regional central banks should keep risk sentiment positive.
• CEEMEA: Currencies like ZAR are expected to appreciate further, while others like HUF and PLN may see more volatility.
• Latam: The BRL is expected to continue its outperformance, while the MXN and COP are at short-term equilibrium. Inflation data will be closely watched.

Conclusion

The document highlights the importance of local fundamentals and yields in EM investment decisions, emphasizing that high-beta and high-yield countries are the most attractive. It also underscores the risks associated with low-beta EMs and the potential for continued capital inflows into EM in July. Overall, the strategy focuses on capitalizing on the divergence in EM performance, with a clear set of recommendations for each region.