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EM Strategy Summary - 22 January 2018

Core Content

This document provides an overview of the current state of Emerging Markets (EM) strategy, focusing on key events and market outlooks across several regions, including CEEMEA, Latin America, and Asia. It highlights political developments, central bank decisions, and economic indicators that are influencing asset prices and FX movements.

Main Points and Key Information

Political Developments

• South Africa:

  • Cyril Ramaphosa has taken steps to reform Eskom, including changing the board and management, and calling for the dismissal of corrupt officials.
  • ANC leadership is considering the removal of President Jacob Zuma, with a potential date of 8 February for his State of the Nation Address.
  • The South African Reserve Bank (SARB) is cautious about a possible rating downgrade following the national budget presentation on 21 February, which may keep monetary policy tight.

• Turkey:

  • Turkey launched an operation in Syria's Afrin region, but the international reaction was relatively limited, resulting in a modest USDTRY increase of 0.3%.
  • The focus is on Treasury bond auctions and the potential for weak bids on 5y and 10y fixed-coupon bonds, which could push up long-end yields.
  • Realised forward returns analysis suggests that investors with long TRY positions may face a sell-off if USDTRY rises above 3.85.

• Romania:

  • Mass protests were held over the weekend, targeting a controversial anti-corruption law passed in December.
  • Critics argue that the law weakens the judicial system.

Central Bank Decisions

• Malaysia:

  • The Bank Negara Malaysia (BNM) is expected to hike interest rates on 25 January due to inflation remaining in the upper band of the target range and rising oil prices.
  • The December CPI data will be released on 24 January, ahead of the policy decision.

• Singapore:

  • CPI data is set for 24 January, and it will be closely watched as investors await the central bank's April monetary policy decision.

FX and Economic Outlook

• South Africa (ZAR):

  • ZAR appreciation is expected to continue, limiting inflation risks.
  • The December CPI print is anticipated to show a modest drop in core inflation to 4.3% and a rise in headline inflation to 4.8%.

• Brazil (BRL):

  • The Appeals court decision on Lula's corruption conviction on 24 January will impact his potential candidacy for the 2018 presidential election.
  • The mid-month inflation for January will be released on 23 January, and the market has reduced the probability of a rate cut by the Central Bank of Brazil beyond the February meeting.

• Mexico (MXN):

  • Bi-weekly inflation data on 24 January is expected to be on the high side, benefiting real rate bonds (UDIBonos).
  • Despite global USD weakness, Banxico has maintained a hawkish stance and may hike rates again in the short term.

• Argentina (ARS):

  • The 7-day repo rate decision is expected on 24 January.
  • Further easing is likely throughout the year, with the central bank having already lowered Lebac rates and confirmed an inverted Lebac curve.

FX Strategy Recommendations

• Hungary (HUF):
  • Recommend being short HUF vs. EUR.
  • Expect the rates market to move ahead of the FX market, with potential for receivers in the belly of the curve to perform well.

Market Analysis

• EM FX Performance:
  • While elevated oil prices have contributed, the main drivers are stronger global economic growth, positive risk sentiment, and rising FDI/portfolio flows.
  • The document is part of the EM Strategy Plus series, highlighting these trends.

Key Events

• 23 January:
  • Brazil releases mid-month inflation data.
• 24 January:
  • Brazil announces the Appeals court decision on Lula's corruption case.
  • Malaysia releases December CPI data.
  • Singapore releases CPI data.
  • Argentina announces the 7-day repo rate decision.
• 25 January:
  • Malaysia announces its policy decision.

Other Information

• The document includes contact details for EM Strategy contacts and production team members.
• It also contains legal notices, disclaimers, and disclosures regarding the nature of the document and potential conflicts of interest.
• The document is non-independent research and intended for professional clients and eligible counterparties under MiFID II.
• It is not investment research and does not constitute an offer to sell or purchase any financial instrument.

Legal and Disclaimer Notes

• The document is a marketing communication and does not provide investment, financial, legal, or tax advice.
• Information is based on public sources and may not be independently verified.
• BNPP may have financial interests in the issuers or market participants mentioned.
• No assurance is given that any indicated returns or results will be achieved.
• The information is for internal use and may be subject to change without notice.

Additional Information

• The document also includes important disclosures regarding options, ETFs, and securities not registered under US laws.
• It mentions the potential for conflicts of interest and the possibility of BNPP engaging in transactions inconsistent with the views expressed.

This summary encapsulates the key political, economic, and market developments impacting Emerging Markets as of 22 January 2018, with a focus on the strategic outlook and recommendations for investors.