20161104-法国巴黎银行-EM_Strategy_Plus_20页_2mb

EM Strategy Plus Summary - 04 November 2016

Core Content

This document from BNP Paribas outlines the current state of Emerging Market (EM) assets and strategies for the upcoming week, focusing on the impact of the US presidential election, EM FX flows, and specific trade recommendations for Turkey, South Africa, and other EM countries.

Main Themes

1. US Presidential Election Impact

• The US presidential election on Tuesday is the main event of the week.
• Market volatility following the election could influence the Federal Reserve's December rate decision.
• EM assets, which are more vulnerable due to weakening US liquidity conditions, are likely to be affected by the election outcome.

2. EM FX Flows and Currency Exposure

• EM portfolio flows slowed to a standstill in October and may continue to decline in November.
• The divergence between crude oil prices and EM FX has been corrected, but the correction has led to a broader risk-off move.
• In CEEMEA, the TRY and ZAR are the most exposed currencies, while CEE countries have a surplus in net external position.

3. Turkey: Currency Depreciation and Strategy

• The TRY has continued to underperform due to lack of support from the central bank.
• The CBRT has not taken strong measures to contain depreciation, and we expect the same in the short term.
• A 6w USDTRY call spread with strikes at 3.25/3.30 is recommended, locking in a profit of 0.33%.

4. Credit Strategy: Turkey vs. South Africa CDS

• The Turkey-South Africa CDS spread has decoupled from FX, but this is expected to reverse.
• We recommend buying Turkey 5y CDS and selling South Africa 5y CDS, targeting a 40bp differential (currently at 26bp).
• The current CDS differential does not accurately reflect the rating difference, but South Africa is unlikely to be downgraded soon.

5. EM Flows: Still Positive, But Slower

• EM inflows have remained positive, though at a slower pace than before.
• The probability of future inflow increases has fallen, according to the IIF Flows report.
• Asia has been the main recipient of EM inflows, while Latam has seen significant bond outflows.

Key Information

New Trade Recommendations

Upcoming Data Releases

• Asia: Indonesia's Q3 2016 GDP (Sat-Mon), Malaysia's GDP (Fri), Hong Kong's GDP (Fri), and China's October trade balance, CPI, PPI, M2, aggregate financing, and new yuan loans.
• CEEMEA: Czech Republic's October CPI (Wed), September retail sales and industrial production (Mon-Tue), Hungary's CPI (Tue), and Poland's NBP monetary policy meeting (Wed).
• Latam: Brazil's October inflation (Wed), Mexico's October CPI (Wed).

Regional Flow Dynamics

• Asia has received the majority of EM inflows in both equities and debt.
• CEEMEA has remained broadly flat, while Latam has seen significant bond outflows (USD 30bn) since the start of the year.

Conclusion

The document highlights the uncertainty surrounding the US election and its potential impact on EM assets, particularly in Turkey. It emphasizes the need for continued monitoring of FX flows and inflation expectations, while recommending specific trades to capitalize on the current market dynamics. The overall sentiment is cautiously optimistic, with EM flows expected to remain positive but at a reduced pace.