德银-新兴市场-宏观策略-新兴市场宏观与策略聚焦-2019.10.4-52页_2mb

EM Macro and Strategy Summary - 4 October 2019

Core Content

This report outlines the macroeconomic outlook and investment strategy for Emerging Markets (EM) across different regions, focusing on FX and Rates, and provides insights into credit markets and trade recommendations.

Main Points

Macro Outlook

• Asia: Growth remains weak, and the Central Bank of Sri Lanka (CBSL) is expected to delay further monetary easing until next year.
• CEEMEA (Central and Eastern Europe, Middle East, and Africa):
  • Inflation is expected to ease in Hungary and Egypt, but to slightly rise in the Czech Republic.
  • The Bol will likely keep rates on hold due to a strengthening ILS, low inflation, and a deteriorating global environment, though FX intervention is expected.
• LatAm:
  • Inflation continues to fall across Brazil, Mexico, and Chile.
  • Colombia's inflation remains below target.
  • Peru's central bank (BCRP) is expected to cut the reference rate due to political noise.

Strategy Focus

• FX: EM FX is expected to benefit from positive surprises in some countries and a broad-based softening in the US. However, without a solid growth turnaround, EM FX is unlikely to strengthen soon.
  • Positive FX: RUB, PLN
  • Negative FX: HUF, ZAR, TRY
  • Key trades: Long PLN/HUF, Short USD/RUB, Long BRL/COP, BRL/PEN, BRL/ZAR, Short PEN/CLP
• Rates: EM central banks are expected to act more aggressively due to the US slowdown and a more dovish Fed.
  • Favorable countries: Brazil, South Africa, Russia, Turkey
  • Underweight countries: Poland, Peru
  • Key trades: Pay 10Y IRS for Poland, Receive 1Y IRS for Russia, Receive 5Y XCCY for Turkey, Long Mbonos 29s for Mexico, Long Soberano 28s for Peru
• Credit: EM credit markets are expected to remain resilient due to lower core yields, lightened positioning, and reduced primary market supply.
  • Positive outlook: Argentina is underweight due to political instability, but may improve with better valuation.
  • Neutral outlook: TRY, Romania
  • Key trades: Switch from 2021s to 2117s for Argentina, 28s vs. 27s for Oman, 49s vs. 46s for South Africa, 46s vs. 40s for Mexico

Key Economic Releases

• Israel: Bol rate decision on 07/10/2019, with a neutral stance.
• Mexico: Gross Fixed Investment (YoY) expected to contract further.
• Chile: CPI (YoY) is expected to rise slightly due to seasonal factors.
• Hungary: CPI (YoY) is expected to edge down to 2.8% due to base effects and lower pump prices.
• Brazil: Economic Activity (MoM) and Retail Sales (MoM) will be released, with mixed expectations.
• India: Industrial Production (YoY) expected to decline.

Performance Overview

• Q3 Performance:
  • Top performers: Turkey (18%), Thailand (11%), Israel (7%)
  • Bottom performers: Colombia (-6%), South Africa (-6%), Argentina (-62%)
• YTD Performance:
  • Top performers: Thailand (23%), Russia (22%), Philippines (21%)
  • Bottom performers: Argentina (-67%), Poland (-2%), Hungary (-3%)
• September Performance:
  • Top performers: Turkey (12.3%), Russia (3.7%), Mexico (3.0%)
  • Bottom performers: Argentina (-12%), Czech Republic (-2.3%), Hungary (-2.3%)

FX Intervention Pressure Analysis

• Countries under pressure to buy FX reserves (weaken exchange rates): KRW, THB, INR, ILS
• Countries under pressure to sell FX reserves (strengthen exchange rates): ARS, TRY, MXN, COP
• Reserve adequacy:
  • Ample reserves: BRL, RUB, PEN
  • Lowest reserves: TRY, MYR, CLP, ZAR
• Most likely to intervene:
  • Weaken currencies: KRW, INR
  • Strengthen currencies: MXN

EM Flow Analysis

• September: EM local markets recovered most of the lost ground after significant outflows in August.
• Equities: Positive surprises led to a reversal of outflows.
• Local debt: Minor outflows observed.
• Q3: Flow dynamics worsened due to record outflows from equities, triggered by trade war re-escalation.
• YTD: EM local markets have seen noticeable inflows, especially into local debt.

Risk Monitor and EMFI/FX Performance

• EM Risk Monitor: Has moved to a risk-neutral level, balancing risk sentiment.
• EMFI/FX Performance Monitor:
  • Local bonds (unhedged) and EMFX (total return) have performed in line with flow indicators.
  • EM local bonds remain rich compared to cumulative flows.
  • EMFX has improved slightly compared to one month ago.

Summary of Trade Recommendations

FX Trades

• Long PLN/HUF: Positive outlook on Poland and Hungary.
• Short USD/RUB: RUB is expected to weaken.
• Buy BRL/COP: Benefiting from oil weakening and BoP issues.
• Buy BRL/PEN: Copper cheapening and political noise in Peru.
• Buy BRL/ZAR: BRL is undervalued relative to fundamentals, while ZAR has weak fundamentals.
• Short PEN/CLP: Relative growth and monetary stance in Peru and Chile.

Rates Trades

• Pay 10Y IRS for Poland: Underweight due to low yields.
• Receive 1Y IRS (vs Mosprime) for Russia: More dovish stance.
• Receive 5Y XCCY for Turkey: Bullish on rates vs FX.
• Long Mbonos 29s for Mexico: More dovish CB and Fed exposure.
• MBONOS 42s vs. 10Y TIIE for Mexico: Changed target due to Fed stance.
• Long Soberano 28s for Peru: Improved valuation.

Credit Trades

• Switch from 2021s to 2117s for Argentina: Continued underweight due to political issues.
• 28s vs. 27s for Oman: Positive outlook due to improving current account and real rates.
• Switch from 46s to 49s for South Africa: Flattening of yield curve.
• Switch from 40s to 46s for Mexico: Due to Fed rate cuts.
• 45s vs. 24Ns flattener for Colombia: Neutral on credit.
• Exit long CDS/bond basis: Due to sharp compression of UST yields.

Conclusion

The report emphasizes the potential for EM FX and Rates to outperform due to the US slowdown and trade tensions. While EM credit markets are resilient, they remain cautious due to global growth concerns. The focus is on country-specific opportunities, with a preference for rates over FX in many cases. Key recommendations highlight the need to monitor inflation, monetary policy, and FX intervention pressures closely.