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EM Strategy Plus Summary - 4 October 2013

Core Content and Key Views

This document outlines the emerging market (EM) strategy for the week of 4 October 2013, focusing on interest rate and currency strategies. The report identifies countries that are highly sensitive to the global economic cycle and recommends positioning for potential rate hikes in these markets.

Top PICKS Countries

• Poland, Israel, the Czech Republic, Korea, and Singapore are highlighted as countries closely correlated with the global economic cycle.
• If EM growth does not roll over, these countries may price in significant rate hikes by H2 2014.
• Paying 1y1y rates in these countries can be a good addition to long duration positions in other EM markets.

Asset Allocation and Strategy Recommendations

Interest Rate Strategies

INR: Pay 1y NDOIS

• Strategy: Pay 1y NDOIS in 10k USD dv01 at 8.65%, targeting 9.25% with a stop at 8.25%.
• Carry: +9bp per month.
• Reasoning: The Indian OIS market has overpriced future easing. The RBI is not planning further CRR adjustments, and the repo rate and MSF rate will be key drivers of NDOIS.

THB: Receive 2y IRS

• Strategy: Receive 2y THB IRS in 10k USD dv01 at 2.73%, targeting 2.46% with a stop at 3.00%.
• Carry: +3bp per month.
• Reasoning: Thai economic data are weak, and core inflation is at the lower end of the BoT's target range. The possibility of a rate cut is increasing, and the market is not pricing this in yet.

Currency Strategies

Portfolio Allocation

• Overweight: Poland, Thailand, Mexico, and Russia.
• Underweight: Malaysia and Turkey.
• Neutral: Brazil.
• New Additions: Front-end receivers in THB IRS.

Key Risk Events

• US Government Shutdown: Affects global growth and sentiment, with implications for the debt ceiling.
• Central Bank Meetings:
  • BoK and BI (Indonesia and Thailand): Expected to keep rates on hold, with BI likely to hike in December.
  • NBH (Hungary): Minutes from September policy meeting will indicate willingness to end easing.
  • BCB (Brazil): Copom meeting is key, with expectations of a 50bp rate hike, though the post-meeting statement will be crucial for future guidance.
• Economic Data Releases:
  • Mexico: CPI and industrial production data will set expectations for rate decisions.
  • Singapore: Q3 GDP estimate will be released alongside MAS monetary policy announcement.

Trade Review

Key Risk Analysis

• The US government shutdown and debt ceiling talks are key risks to global growth and sentiment.
• Front-end swaps in INR and THB are recommended due to overpricing of easing in the market.
• Rate cuts in Thailand are increasingly likely, and front-end rates may rally.
• Carry is a key factor in several strategies, with positive carry in INR and THB.

Additional Insights

• The PICKS countries (Poland, Israel, the Czech Republic, Korea, and Singapore) have rates at or near record lows.
• Front-end receivers in PLN, CZK, and THB are attractive given the potential for rate hikes.
• Steepeners in KRW are preferred due to concerns over excessive currency appreciation.
• Fwd payers in Poland, Israel, and the Czech Republic are seen as attractive if rate hikes begin.
• The risk-off environment could also benefit these strategies, as seen in May to August 2013.

Strategy Rationale

• India: Pay 1y NDOIS due to overpricing of easing, with a target of 9.25% and a stop at 8.25%.
• Thailand: Receive 2y IRS due to potential rate cuts, with a target of 2.46% and a stop at 3.00%.
• Emerging Markets: The report emphasizes the importance of positioning for rate hikes in countries sensitive to the global cycle.

Conclusion

The strategy is centered around identifying EM countries that are likely to benefit from global rate tightening, particularly the PICKS countries, and positioning for potential rate hikes. The report also highlights the importance of carry and liquidity conditions in shaping the recommendations. While the US government shutdown and debt ceiling talks pose risks, the market is currently pricing in a slow normalization of the rate corridor, which supports the strategy of paying front-end swaps. The portfolio allocation remains unchanged, with a focus on overweighting certain EM markets and underweighting others based on their sensitivity to global economic conditions.