20151002-法国巴黎银行-EM_Strategy_Plus_20页_3mb

EM Strategy Plus Summary - 02 October 2015

Core Content

This document outlines the current state of emerging market (EM) corporate credit and currency dynamics, with a focus on the impact of G4 central bank policies, the risk of corporate distress, and strategic trade recommendations for the week of 2 October 2015. It also includes specific views on key EM economies such as China, Indonesia, Singapore, Thailand, Turkey, and Brazil.

Main Points and Key Views

1. Corporate Credit Surge in EM

• Over the past ten years, EM corporate credit has surged significantly.
• Total EM corporate debt now accounts for 75% of EM GDP, up from 45% in 2005.
• The rise in credit is largely due to G4 central bank liquidity injections and low interest rates.
• Corporate debt levels in several EM countries are now close to or exceeding those seen during the 1990s Asian crises.
• High yield (HY) spreads over high grade (HG) are expected to widen in 2016, despite potential outperformance during Fed rate hikes.

2. EM Currency Performance and Volatility

• EM currencies have faced significant pressure, particularly after the RMB devaluation in August 2015.
• The USDCNH volatility has reached record highs, and a stable RMB could lead to a decline in volatility.
• The THB NDIRS curve is expected to steepen, with a target of 120bp and stop loss at 70bp.
• The SGD has been overbought, prompting a take profit on the long position ahead of the MAS policy review.

3. Market Stabilization Efforts

• Indonesian authorities have introduced measures to stabilize the IDR, including additional financing and incentives for exporters.
• These measures aim to improve liquidity and reduce market dysfunction, but are limited in effectiveness.
• The global risk mood needs to improve for the IDR to rebound significantly.

4. EM Corporate Distress and Financial Sector Risks

• The rise in corporate indebtedness increases the risk of distress, which can transmit to the financial sector.
• A stress test by the IMF shows that debt at risk has risen significantly in several EM countries.
• Brazil stands out as the most vulnerable due to its currency depreciation, rising interest rates, and economic contraction.
• Petrobras appears to be overpriced, while Brazilian banks are underperforming.

Key Trade Recommendations

Regional Insights

China

• PBoC reasserting control: The central bank is intervening to stabilize the RMB and prevent self-fulfilling depreciation.
• Sell USDCNH volatility: Due to the record high volatility, selling 1y ATMF straddles is recommended.
• Capital outflows: The evidence supports the view that outflows are due to the unwinding of the CNH carry trade, not a structural capital flight.
• Currency conundrum: The PBoC is caught between pegging the RMB and allowing it to float, both with risks.

Indonesia

• Fighting fires: Authorities have introduced measures to stabilize the IDR, including additional financing and export incentives.
• Currency forwards: At distressed price levels, there is value in Indonesian assets, but global risk mood is a key factor for a significant rebound.

Thailand

• NDIRS curve steepener: A 3y10y steepener is recommended with a target of 120bp and stop loss at 70bp.
• Expectation of policy easing: The bond supply duration is expected to increase, leading to curve steepening.

Turkey

• Cautious stance: Recommend underweight position in fixed coupon bonds and the currency.
• Inflation focus: Expect CPI data to be a key factor in the coming week.

Brazil

• BCB intervention: Direct USD sales in the spot market would be more effective than current measures.
• Debt at risk: High levels of corporate debt and currency depreciation make Brazil vulnerable.
• Market view: Long Petrobras and short Brazilian banks are recommended.

Latam

• Brazilian influence: EM risk assets are affected by Brazilian market developments.
• Mexico's FX intervention: Extended until end-November, with USD 200mn daily sales.
• Chile's inflation: Expected to slightly fall, but hawkish communication may lead to rate hikes.

Global Outlook

• IMF/WB meetings: Will be closely watched for policy signals and market reactions.
• Global risk mood: Needs to improve for EM currencies to recover.
• Fed rate hikes: Expected in March 2016, which could temporarily narrow EM HY-HG spreads.

Conclusion

The document highlights the risks and opportunities in EM corporate credit and currency markets. While the surge in debt is a concern, the potential for volatility reduction and currency stabilization offers strategic trading opportunities. The IMF stress test underscores the fragility of EM corporates, particularly in China, Brazil, and Indonesia. The recommendations reflect a cautious approach with a focus on volatility selling, curve steepening, and currency stabilization.