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EM STRATEGY | GLOBAL WEEKLY - 9 June 2017 Summary

Core Content

This document outlines the current market implications and strategies for Emerging Markets (EM) across different regions, including Asia, CEEMEA, and Latin America (Latam), with a focus on the Qatari diplomatic tensions and their effects on financial markets.

Key Themes and Analysis

Qatari Tensions and Market Implications

• Diplomatic Spat: The current dispute between Qatar and some of its neighbors has led to local financial market volatility and raised concerns about broader regional implications.
• No Depegging Expected: Despite the tensions, the Qatari riyal is not expected to depeg from the USD in the short or medium term. Qatar's strong fundamentals, including substantial external assets and a comfortable balance sheet, support this view.
• Economic Impact: The embargo may increase import costs, especially for food and consumer goods, and could affect infrastructure projects for the 2022 FIFA World Cup. However, the country is well-positioned to manage these challenges.
• GCC Currencies: While Qatar remains stable, Oman and Bahrain face higher depegging risks due to weaker fundamentals and lower reserves.

CEEMEA Credit Strategy

• Relative-Value Opportunity: The strategy recommends switching from Poland $ '24s to Hungary $ '24s due to the attractive spread differential. Poland is viewed as having higher fiscal and Eurobond supply risks than Hungary.
• Turkey: The Monetary Policy Committee (MPC) is expected to keep the interest rate corridor unchanged. The central bank is likely to maintain the repo rate at 12%, and the Treasury will continue high issuance of local bonds.
• FX Forward Movement: The document highlights that FX forwards for the region may move higher if tensions intensify, but for now, the Qatari riyal remains stable.

Brazil IR/DI Strategy

• Selic Rate Cuts: The strategy suggests adding risk to the short end of the curve, as the economic weakness and need for rate cuts outweigh the conventional argument for a higher terminal Selic rate.
• DI Receivers: The document recommends increasing the receiver position in DI Jan19s in Brazil, given the current interest rate environment.

Mexico

• State Elections: The results of state elections are seen as supportive of long positions in Mexican risk assets, reducing political uncertainty.
• Peso Appreciation: The strengthening of the Mexican peso has led to partial profit-taking on the long USDMXN Seagull position.

Latam FX Valuation

• Latam FEER: The new framework for valuing Latam currencies suggests that BRL, CLP, and PEN are currently undervalued, while COP and ARS are overvalued. MXN is considered to be around fair value.

New Recommendations

Market Updates

Asia

• Bank Indonesia: Expected to keep policy on hold and provide neutral guidance.
• China: Likely to release May monetary aggregate and credit growth data, showing a slowdown in credit growth. May industrial production and retail sales data will also be released.
• India: CPI report is due, with potential for further rate cuts if inflation continues to surprise on the downside.
• Philippines: Remittance data is expected to surprise to the downside, potentially supporting a bullish view for PHP.

CEEMEA

• Russia: The CBR is expected to cut rates by 50bp to 8.75% in its policy meeting on 16 June. The average repo funding rate is expected to remain at 12%.
• Poland: Final May CPI data and core inflation data will be released, with expectations of a slight increase in core inflation.
• Turkey: The MPC is expected to keep the interest rate corridor unchanged. The focus will be on the central bank's liquidity stance and repo funding rate.

Latam

• Chile: Expected to keep policy rates at 2.50%.
• Brazil: The BRL remains steady, supporting the view of an oversupply of USD and continued high carry. The strategy favours long BRL positions and DI receivers in the short end of the curve.

FX and Options Strategy

Key Risks and Opportunities

• Qatar: Credit spreads and FX forwards have widened, but the QATAR '46s are expected to remain stable.
• Oman: Higher depegging risk due to weaker fundamentals and lower reserves.
• Turkey: Continued high issuance of local bonds and stable interest rate corridor.
• Mexico: Partial profit-taking on the short USDMXN position due to peso appreciation.
• Brazil: Continued focus on the short end of the DI curve and long BRL positions.

Conclusion

The document highlights the impact of geopolitical tensions on EM markets, particularly in the GCC region, and offers strategic recommendations for investors based on relative-value opportunities, FX valuations, and credit fundamentals. The outlook for many EM currencies remains cautiously optimistic, with a focus on maintaining positions in currencies and bonds that are seen as relatively stable or undervalued.