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EM Strategy Daily Summary - 20 February 2018

Core Content Overview

This document is a daily report from the Emerging Markets (EM) Strategy team at BNP Paribas, focusing on market updates, investment views, and legal disclosures. It provides insights into key EM markets, including India, Turkey, and Latin America, and highlights the current economic and financial conditions affecting them.

Key Market Updates

India

• The Indian rupee (INR) faced pressure due to two negative news flows:
  • Restriction of market data provision: The Indian government restricted market data provision to indices where Indian securities constitute at least 25% of the index, potentially leading to a reduction in India's weighting in the MSCI Emerging Markets Index.
  • Fraud case: A fraud case involving a fraudulent borrower and several state-owned banks negatively impacted the rupee.
• The INR has weakened but remains within the 63.50–64.50 trading range.
• The report advises against fading this weakness and suggests waiting for levels where the Reserve Bank of India (RBI) may intervene (around 65.50–66.00).
• The Q4 2017 GDP growth slowed to 4% from 4.3%, contributing to the weakening of the currency.

Turkey

• The report recommends adding 5k USD DV01 to the pay 1y1y TRY cross-currency recommendation.
• It highlights that interest rates in Turkey need to stay higher for longer to bring inflation down to single-digit levels.
• The current curve is pricing only 50bp of rate hikes up to the 1-year point and 100bp of cuts beyond that, which is insufficient according to the strategy.
• The strategy team has reiterated their conviction by increasing their existing 5k position at a more attractive level of 13.09 (from 13.28).

CEEMEA

• Geopolitical tensions around Syria are increasing, particularly with reports that the Syrian government is entering Afrin, a region where Turkish military forces are active.

Latin America (Argentina)

• The current account deficit is estimated to have widened to 5.2% of GDP in 2017 from 2.8% the previous year.
• Fiscal consolidation is expected to help moderate the external imbalance over time, but dependence on external markets will remain strong in the near term.
• The report references "Argentina: Twin deficits" for further details.

Main Views and Recommendations

• India: Continued weakness in the rupee is expected until non-performing loans (NPLs) are fully recognized. The report advises caution and recommends waiting for RBI intervention levels.
• Turkey: Rates are expected to remain higher for longer to bring inflation down. The strategy team has increased their position in 1y1y TRY cross-currency rates.
• CEEMEA: Geopolitical tensions in Syria are a key risk factor.
• Latam: Argentina's current account deficit is a major concern in a volatile financial environment. Fiscal consolidation is seen as a long-term solution, but external dependence remains high.

Upcoming Data Releases

• Poland: January industrial production, retail sales, and PPI data will be released today.

Legal and Regulatory Information

• The document is non-independent research and is intended for Relevant Persons as defined by MiFID II.
• It is a marketing communication and not investment research.
• The document does not constitute an offer to sell or issue any financial instrument.
• It contains hypothetical and back-tested performance data, which is for illustrative purposes only and does not guarantee future results.
• There may be conflicts of interest due to BNP Paribas' involvement in trading, underwriting, or advisory services related to the discussed instruments.
• The document is confidential and should not be copied or distributed without prior written consent.
• U.S. Disclosures include important information about options, ETFs, and securities not registered under U.S. law, emphasizing the need for qualified institutional buyers or non-U.S. persons.

Contacts

Additional Information

• The BNP Paribas Global Markets Website is available at www.globalmarkets.bnpparibas.com.
• The report is subject to legal notices and disclaimers regarding accuracy, completeness, and potential conflicts of interest.
• The production team includes Barbara Consuelo in London.
• The editorial team includes Amanda Grantham-Hill, Anna McLaughlin, and Varghese Joseph.