20161021-法国巴黎银行-EM_Strategy_Plus_30页_3mb

EM Strategy Plus Summary - 21 October 2016

Core Content

This document is a weekly report from BNP Paribas on Emerging Market (EM) investment strategies, focusing on bond issuance, interest rate movements, FX trades, and credit opportunities. It highlights the continued demand for EM bonds and duration, despite some risks from global monetary policy tightening and economic slowdowns. The report includes specific recommendations for various EM markets and an analysis of recent market trends.

Main Themes and Recommendations

Asia

• Taiwanese Rates (TWD NDIRS):

  • The market is pricing in policy tightening, but economic data may not sustain recent improvements.
  • Recommendation: Receive 2y TWD NDIRS at 0.70% with a target of 0.60% and a stop loss at 0.75%.

• Philippine Peso (USDPHP):

  • The peso was oversold, and the recommendation to short it has been taken profit.
  • Market sentiment may still swing, so the strategy is to fade extreme moves.

CEEMEA

• Relative Value FX Trades:
  • Opportunities exist due to changes in real rate spreads.
  • Recommendation: Go long TRYZAR at 4.55 targeting 4.80 with a stop loss at 4.45; go long PLNHUF at 71.30 targeting 73.00 with a stop loss at 70.80.

Turkey

• CBRT Policy:
  • The central bank kept rates unchanged, contrary to market expectations.
  • The rate cut and increase in short foreign FX positions suggest further weakening of the TRY.
  • Recommendation: Expect further weakness in TRY due to carry reduction and FX position changes.

Slovenia

• Bond Tenders:
  • Slovenia's USD bond tenders have outperformed.
  • Recommendation: Remain positive due to improving fundamentals and reduced USD debt.

Mexico

• MXN Valuation:
  • The peso is undervalued by ~8% against the USD.
  • Recommendation: Increase digital option strategy with a target of higher values.

Brazil

• IR/DI Flattening:
  • A flattening trade between DI Jan-19 and DI Jan-23 has been extended.
  • Recommendation: Extend target to -50bp.

Argentina

• 10y Local Currency Bond:
  • Priced for perfection, suggesting high cost.
  • Recommendation: Avoid allocation in peso-denominated bonds for leveraged accounts.

New Recommendations

Key Insights

• Large EM Bond Issuance:

  • The USD 17.5bn Eurobond issue was the largest ever, showing strong investor interest in EM and duration.
  • EM Eurobond issuance has increased from 2015 levels, driven by low yields in developed markets and increased budget deficits.

• Interest in Duration:

  • The bond included a 30-year tranche, indicating a shift towards longer maturities in EM.
  • 28 EM countries offer Eurobonds with maturities over 25 years, and the outstanding amounts are increasing.

• Regional Impact:

  • Spreads in EM markets have tightened, showing good absorption of the large bond issue.
  • Expectations of policy tightening and potential rate cuts are rising in several markets.

• Looking Ahead:

  • Interest rate differentials will continue to support EM, but the US rate hike and rising real yields may complicate the outlook.
  • The Fed's limited tightening in 2017 is expected to keep the near-term outlook robust.

Key Risks

• Asia:

  • Continued bearish momentum in rates.
  • Potential for further weakness due to supply dynamics and strong USD.

• CEEMEA:

  • Rising oil prices may impact inflation expectations.
  • Sharp tightening of inter-bank liquidity could affect TAIBOR fixing.

• Turkey:

  • Continued divergence between EM FX and oil prices may lead to a correction.
  • CBRT's cautious stance may not be enough to stabilize the TRY.

• Global:

  • Sustained rise in oil prices and US rate hikes could keep rates markets under pressure.
  • The risk of a surprise rate cut in Turkey remains.

Summary of Trade Review

• Asia:

  • Took profit on short USDPHP and 3y KRW NDS receiver.
  • Made a 2y TWD NDIRS receiver trade.

• CEEMEA:

  • Made long PLNHUF and TRYZAR recommendations.
  • Took profit on USDZAR put fly option.

• Latam:

  • Closed long Argentina 2021 position.
  • Extended targets for Brazil DI flattener and MXN digital put.

Conclusion

The report emphasizes the strong interest in EM bonds and duration, with a focus on tactical and relative value trades. Despite some risks from global monetary policy and economic data, the outlook remains cautiously positive, especially in markets with improving fundamentals and favorable rate spreads. The recommendations are based on technical analysis, economic indicators, and central bank policy expectations.