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EM STRATEGY | GLOBAL WEEKLY - 26 January 2018 Summary

Core Content

This report outlines the current state of emerging market (EM) assets and provides insights into key events and market dynamics for the week of 26 January 2018. It is produced by the EM Strategy Team at BNP Paribas, with contributions from various regional experts.

Main Points

• Positive EM Sentiment: Strong global growth, particularly in EM countries, continues to support positive sentiment. Despite strong gains in 2018, further growth is expected.
• IMF Forecasts: The IMF has upgraded global growth forecasts, with the most significant improvements in developed markets like the US and Euro Area. EM growth forecasts remain unchanged.
• EM Asset Performance: EM equities and FX have shown strong performance, with EM equities up 8.7% and FX up 3.2% so far in 2018. EM credit has tightened by 13bp.
• Central Bank Interventions: Central banks in EM are increasingly intervening in FX markets and delaying rate hikes, which may support EM hard currency bonds and equities.

Key Themes

1. Indian Budget: Bond Investors - Be Patient

• Budget Deficit: The FY18 target of a 3.2% of GDP budget deficit is likely to be missed and rolled out to FY19.
• Fiscal Outlook: FY19 revenue is expected to benefit from faster economic growth and GST collections becoming active.
• Expenditure: Expenditure is likely to rise as the government aims to boost the economy before the 2019 general election.
• Bond Market Impact: The government's fiscal deficit and bond supply will influence the yield curve. The RBI is expected to support the bond market, but may not prevent further yield increases.
• Tax Policy: There is speculation about a long-term capital gains (LTCG) tax on equities, which could negatively impact sentiment and STT collections. However, this is unlikely to be implemented.
• Fiscal Prudence: The government will need to display fiscal prudence to maintain credit ratings, while balancing the needs of different economic segments.

2. Asia FX: How to Read an Activity Spike

• Activity Spikes: Increases in NDFs and options activity may signal a market break-out or trend exhaustion.
• Current Trends: Asian currencies are rising on strong volumes, but no extreme volumes are observed that would suggest a trend reversal.
• USD Call/Put Ratio: The increasing popularity of USD puts indicates market sentiment towards USD downside, reinforcing the current trend.

3. Argentina: USD Demand Continues

• USD Purchases: High USD purchases by the non-financial private sector in Argentina.
• Vulnerability: Argentina's reliance on portfolio flows and current account deficit makes it vulnerable to a reversal in risk sentiment.

4. Brazil's Annual Borrowing Plan: A Better Scenario for 2018

• Borrowing Requirements: Net borrowing requirements for Brazil in 2018 are estimated at BRL 637.5bn (USD 203bn), a 3% reduction from 2017.
• External Scenario: A benign external environment with recovery in local and global activity and favorable inflation is expected.

5. Colombia: Diverging Drivers

• Principal Component Analysis: The COP and 5y CDS are influenced by USD systemic risk and terms of trade, but domestic economic surprises are the main drivers of COP rates.
• Trade Strategy: The team is taking profits on the short USDCOP 3-month NDF recommendation, with a profit of 8.4%.

Trade Recommendations

• Asia: No changes to trade recommendations.
• CEEMEA: No changes to trade recommendations.
• Latam: Taking profits on the short USDCOP 3-month NDF.

Key Data and Events

In Asia

• India's Union Budget: Expected on 1 February 2018. The focus will be on fiscal prudence and economic growth.
• Economic Data: South Korean industrial production and leading indicators, Thai trade, and Taiwanese GDP data are due on 31 January 2018.
• PMI Numbers: Expected for China and other countries on 31 January and 1 February 2018.

In CEEMEA

• Turkey: CBRT's quarterly Inflation Report on 30 January 2018. Expectation of an 8.5% y/y inflation forecast.
• Hungary: First central bank meeting of the year on 30 January 2018. No rate hike expected.
• Czech Republic: Policy meeting on 30 January 2018. Expected rate hike of 25bps to 75bps.
• Presidential Elections: Second round in the Czech Republic on the weekend, with inauguration on 8-9 March.

In Latam

• Colombia: Central bank is expected to remain on hold at its first monetary policy meeting of the year on 29 January 2018.
• Ratings Reviews: S&P and Fitch will review Albania, Kuwait, Mozambique, Azerbaijan, Macedonia, and Slovakia. Mozambique, Azerbaijan, and Macedonia have a negative outlook, while Slovakia has a positive outlook.

Trade Positions and Performance

Outlook

• The EM Strategy Team expects continued strong performance in EM assets, with potential for further gains in the next few months.
• The central banks are likely to intervene in FX markets and delay rate hikes, which may support EM hard currency bonds and equities.
• The Indian budget is a key focus, with the expectation of a slight improvement in the budget deficit and a focus on fiscal prudence and economic growth.
• The team is taking profits on the short USDCOP 3-month NDF, indicating a positive trend in the Colombian peso.
• The report suggests that EM equities and FX are still attractive for foreign investors, despite the current level of yields.