20180406-高盛-EM_Strategy_Views__Credit_weakness_is_no_macro__canary__27页_1mb

EM Strategy Views Summary

Core Content

The document outlines the current state of Emerging Markets (EM) credit and its performance relative to other EM asset classes and global markets. It provides a strategic perspective on EM investments, emphasizing that while credit markets have underperformed, this is not necessarily a sign of macroeconomic distress.

Main Points

• Credit Weakness is Not a Macro Canary: EM credit weakness is not an early signal of macroeconomic downturns, but rather a reflection of technical factors and stretched valuations compared to EM equities and FX.
• EM Credit Performance: EM credit has underperformed in 2018, but its trajectory is consistent with historical credit corrections. EM equities and FX have rebounded more quickly than expected.
• Credit vs. US Rates: EM credit underperformance is not solely due to US rate hikes. Other global assets have moved in sync with EM credit, indicating that the underperformance is more about valuation and technical factors than macroeconomic fundamentals.
• Fundamentals Remain Strong: Despite credit weakness, EM macro fundamentals (growth, inflation, current account balances) have improved. Corporate interest coverage ratios are healthy, even with rising leverage in some countries.
• Historical Precedent: EM credit has historically signaled macroeconomic risks before significant equity sell-offs. However, in the current context, the credit weakness is not leading but rather lagging due to continued macro headwinds.
• Latin America as Tactically Superior: Latin America is highlighted as a preferred tactical region for EM exposure. It outperformed Asia in credit markets during the recent sell-off and is expected to continue this trend due to better fundamentals and market dynamics.

Key Information

1. Credit Weakness and Macro Risks

• Headline Risks: Trade war, Fed leadership changes, and global growth concerns have pressured markets.
• Credit as the Weak Link: EM credit has been the weakest link, but this is not a sign of macro distress.
• Rebound in Equities and FX: EM equities and FX have rebounded more quickly than credit, which may be premature given the ongoing macro risks.

2. Credit Performance and Valuation

• Credit Laggard: EM credit has posted negative returns, while local bonds and FX have performed well.
• Valuation Context: EM credit is relatively expensive compared to equities, which may explain its underperformance.
• Historical Comparison: Credit weakness in EM has followed a similar pattern to past slowdowns, not bear markets.

3. Credit Behavior and Asset Correlation

• Credit Spreads and Equities: Credit spreads and equity valuations move closely together.
• Global Synchronicity: EM credit has moved in sync with other global assets, except for the US 6-month Treasury, which has deviated.
• Relative Value Trade: EM credit is preferred over US High Yield, and Latin America is seen as a better relative value opportunity than Asia.

4. Fundamentals and Leverage

• Healthy Fundamentals: EM macro fundamentals are improving, with lower inflation, stronger growth, and better current account balances.
• Corporate Interest Coverage: Corporate interest coverage ratios are healthy, especially in the post-2011 period.
• Leverage Concerns: Some EMs, like Turkey, have high leverage ratios, making them more vulnerable to external shocks.

5. Latin America as the Tactically Preferred Region

• Outperformance in Credit: Latin America credit outperformed Asia in the recent sell-off and is expected to continue this trend.
• Carry and Commodity Exposure: Latin America offers higher carry and is less sensitive to FX headwinds compared to Asia.
• Political and Economic Improvements: Political developments and improving economic conditions in Brazil, Mexico, and Chile support the outperformance narrative.

Strategic Recommendations

• Strategically Bullish on EM: EM assets are expected to rise in 2018, despite the recent credit weakness.
• Tactically Favor Latin America: Investors should consider Latin America over Asia for tactical exposure, given its better fundamentals and relative value.
• Relative Value Opportunities: The EM credit vs. US High Yield trade is seen as a strong relative value opportunity.
• Market Neutral Approach: While EM is a strong long-term investment, tactical market-neutral strategies are recommended to navigate near-term volatility.

Conclusion

The document concludes that EM credit weakness is not a macroeconomic canary but rather a reflection of technical and valuation factors. Latin America is highlighted as the preferred tactical region, and EM assets are expected to perform well in 2018 despite the current challenges in credit markets. Investors are advised to maintain a long-term EM bias while looking for tactical opportunities, particularly in Latin America.