20140307-法国巴黎银行-EM_Strategy_Plus_21页_1mb

EM Strategy Plus Summary - 7 March 2014

Core Content Overview

This report provides a weekly update on investment strategies for Emerging Markets (EM) in the areas of interest rates, foreign exchange (FX), and credit. It includes key views, asset allocation changes, trade reviews, and risk events, with a focus on how recent economic and political developments are affecting EM markets.

Main Views and Asset Allocation

EM Focus: A (Mini) Supply Shock from Food Prices

• Inflation remains low in the G3 (USA, Japan, Germany), and concerns about high inflation have eased in many EMs.
• Food prices (along with other commodities) have surged recently, indicating potential inflation risks in the future.
• Countries with a high proportion of food imports and weak currencies, such as Russia, Indonesia, Colombia, the Philippines, and South Africa, are expected to face rate increases in the coming weeks.
• El Niño conditions are increasingly likely, which could further support food prices.
• South Africa is particularly vulnerable due to the strong correlation between local and global food prices.

China: Reform, Regress, Repeat

• The challenge of balancing reform with growth in China is intensifying.
• The PBoC has adopted an easing stance, and regulatory adjustments will continue.
• The NPC reaffirmed objectives for deposit-rate liberalisation, which is seen as encouraging.
• Recommendations include 5y Shibor-repo spread wideners and 2y5y Shibor curve steepeners.

Asia: Getting Back the Mojo

• Inflows to Asian local markets have accelerated, especially in Indonesia, India, and Malaysia.
• China's policy easing is a bullish catalyst for Asian growth sentiment.
• Malaysia is recommended to be neutral, but the currency is expected to weaken by year-end.
• Thailand is expected to see a rate cut in March, and investors are advised to overweight duration in local debt.

Turkey: Time to Buy 10y Bonds

• Turkey's sovereign issuance and political tensions are driving up bond yields.
• No further bond auctions are planned until 31 March, and April borrowing needs are lower than in March.
• The negative news has already been priced in, and the 10y TURKGB is recommended for long positions, targeting a 10% compound yield.

Russia: Reduced Underweight, Short ZARRUB

• Russia has been reduced to one notch below market weight due to its economic challenges.
• The CBR has intervened to support the rouble, despite weakening fundamentals.
• Short ZARRUB is recommended as a relative-value trade, while long ZAR is seen as vulnerable.

South Africa: Close 1y1y IRS Receivers, Pay 5y ZAR IRS

• South Africa is advised to close 1y1y ZAR IRS receivers and pay 5y ZAR IRS.
• The ZAR is increasingly vulnerable due to slow monetary policy tightening by the SARB.
• The RUB is likely to remain supported by the CBR in the short term.

Poland: Neutral from Slight Overweight

• Poland has moved to neutral due to potential trade sanctions from Russia.
• PLN is expected to be the most exposed of the CEE currencies.
• PLNHUF long positions were closed, and PLN vs EUR spread receivers are recommended.

Mexico: Back to Market Weight

• Mexico has been moved back to market weight as the good news has already been priced in.
• FX models suggest the MXN is undervalued, but this is not enough to justify an overweight position.
• Duration reduction and tactical trading are recommended.

Brazil: Market Weight, Steepeners Recommended

• Brazil has been moved to market weight due to its recent outperformance.
• BRL DI Jan'15/Jan'17 steepeners are recommended, as the currency has shown structural bearishness.
• The current account and fiscal data have disappointed, but the ZAR is seen as a better short candidate.

New Recommendations

Key Risk Events

• Ukraine remains a focus, with a referendum on 16 March and sanctions already in place.
• Central Bank of Thailand is expected to cut rates on 12 March.
• China's trade and credit data will be released, with a focus on continued credit easing.
• El Niño conditions are expected to rise in probability, potentially supporting food prices.
• Russia's eurobond sell-off supports the recommendation to switch out of RUSSIA'42 and RUSSIA'17 into RUSSIA'22 and TURKEY'17.

Trade Review

• BRL DI Jan'15/Jan'17 steepeners reached their target.
• BRLCLP long trade was profitable, and USDCLP short trade was closed with a small loss.
• ZAR receiver was closed, and ZAR IRS pay trade was initiated.
• TRYMXN long trade was closed with a small loss.
• Buy 10y TURKGB and short ZARRUB are new recommendations.
• EURPLN was sold with a positive P/L.
• Options trade involving USDRUB put and USDZAR put was initiated.

Summary of Asset Allocation Changes

• Russia: Reduced underweight to one notch below market weight.
• South Africa: Increased underweight.
• Brazil, Mexico, Poland: Moved to market weight.
• Turkey: Slightly overweight, with a focus on 10y TURKGB.
• Indonesia: Maintained modest overweight.
• Hungary: Recommended 2m EURHUF DNT and short PLNHUF.
• Poland: Overweight the back end of the local debt curve.
• Mexico: Neutral, with a focus on tactical trading.

Conclusion

The report highlights the impact of food price surges and currency weakness on EM inflation and rate expectations. It recommends shorting vulnerable currencies like ZAR and PLN, while buying bonds in Turkey and Russia. China's policy easing is seen as a positive for Asian growth, and market reforms are expected to continue gradually. The FX and credit markets are closely monitored for potential shifts and opportunities.