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EM Strategy Summary - 18 August 2017

Core Content

This document outlines the Emerging Markets (EM) Strategy update from BNP Paribas for the week of 18 August 2017, focusing on geopolitical risks, currency dynamics, interest rate strategies, and credit opportunities across key regions including Asia, CEEMEA, and Latam. It also includes a trade review and new recommendations based on market analysis and risk assessments.

Main Views and Key Information

Geopolitical Risk and Market Impact

• Political risk remains significant in emerging markets, and the strategy team believes that some risk premium in selected markets is justified.
• Military exercises by the US and South Korea (21-31 August) and Russia/Belarus (14-20 September) are expected to generate headline news and increase market volatility.
• North Korea is a key area of focus due to its missile testing and potential conflict with the US. CDS spreads have widened but not to levels indicating an imminent crisis.
• Russia's Zapad military exercise (14-20 September) is expected to raise concerns about military readiness and possible military actions against neighboring countries.

Argentina

• Political uncertainty has decreased following the primary election, leading to a tactical long position in ARS.
• Lebac auction results showed increased investor interest in longer tenors, with the central bank lowering rates for such tenors.
• USDARS 3m NDF was sold to initiate a long ARS strategy.

Kenya

• Uhuru Kenyatta won the presidential election with 54% of the vote, leading to a market rally.
• KES strengthened by 0.7% and Kenya 24's tightened by 37bp.
• Opposition candidate Raila Odinga has raised concerns about the election results, but violence is expected to remain localised.
• The Supreme Court will rule on the election results by the end of August.

South Africa

• The Zuma camp faces internal challenges within the ANC, including a no-confidence motion.
• The ANC leadership election in December 2017 and the 2019 presidential election are key upcoming events.
• Inflation data for August 23 is expected to show a decline to 4.5%, returning to the midpoint of the central bank's target band.
• The market is likely to price in further rate cuts of 50bp this year and 100bp for the full cycle.

Themes of the Week

China

• Buy NCDs through Bond Connect as onshore NCD yields trade significantly above CNH cross-currency swaps.
• 1Y NCDs are recommended, as they offer better valuation than government or corporate bonds.
• Bond Connect and CIBM provide access for offshore investors, improving the onshore-offshore dynamic.
• CNH cross-currency swaps have fallen significantly, creating a discount to onshore bonds.
• 1Y CNH implied yields have dropped from 6.5% in January to 3.6% now.
• Outstanding NCDs reached CNY 8.4trn or 13% of China's total bond market as of July 2017.
• PBoC is including NCDs in its macro-prudential assessments from Q1 2018, which may slow issuance as banks clean up off-balance-sheet assets.

Brazil

• DI receiver position has been rebuilt by locals, but the DI market is over-crowded.
• Fiscal target revisions led to an increase in DI Jan20sJan21s FRA receiver.

Mexico

• Non-residents' share of public debt fell slightly from 33.5% in June to 33.4% in early August.
• Pension funds' assets increased by 1.15% in July.
• USDMXN 21.00 one-touch is recommended to hedge bullish strategies in the long end of the TIIE curve.

Trade Review and New Recommendations

What's Up Next Week?

Asia

• US and South Korea will begin 10-day military drills near the North Korea border, likely to increase geopolitical tensions.
• Bank Indonesia will hold its Monetary Policy Committee meeting on 22 August, with rate cuts possible if inflation remains low.
• Singapore will release industrial production and CPI data, which may influence MAS policy.
• Hong Kong will conduct EFN bill auction, which is expected to reduce excess liquidity.

CEEMEA

• South Africa will release inflation data on 23 August, with a decline to 4.5% expected.
• Hungarian central bank will hold a policy meeting on 22 August, with no rate changes anticipated.

Latam

• Brazil will focus on legislative agenda, including social security reforms.
• Mid-month inflation data is expected to continue the downward trend.

Summary of Key Recommendations

• Buy 1Y NCDs via CNH CCS for fully funded offshore investors.
• Sell USDARS 3m NDF to initiate a tactical long ARS.
• Close buy Turkey 5y CDS basis due to CDS roll in September.
• Short USDARS via 3m NDF as a new recommendation.
• Long USDMXN 21.00 one-touch to hedge bullish strategies.
• Long USDBRL OT 2.90 and short USDBRL CS k=3.35-3.65.
• Buy Ghana '30s and Buy Turkey '45s for credit opportunities.
• Buy Argentina SY CDS with a stop loss on 5Y EM CDX.