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EM Strategy Summary - 21 April 2017

Core Content

This document provides a comprehensive overview of the Emerging Markets (EM) investment strategy from BNP Paribas across various regions, including Asia, CEEMEA, and Latin America (Latam). It outlines market expectations, trade recommendations, and specific investment opportunities, with a focus on interest rates, foreign exchange (FX), and credit instruments.

Main Themes and Views

1. Lower Rates, More Flows for EM

• Expectation: Lower US interest rates are expected to support inflows into higher-yielding EM assets.
• Commodity Outlook: Commodity positioning data has become less extreme, indicating reduced risk for commodity prices.
• Recommendation: Investors are advised to remain cautious as May historically presents challenges for EM markets.

2. China: Credit Bond "Watch List" and CGB Futures

• CGB Futures Launch: The Hong Kong Exchange (HKEX) launched a non-deliverable futures contract on Chinese government bonds (CGB), allowing non-resident investors to trade China rates.
• Watch List: A list of 30 corporate bond issuers and 10 Chinese banks is provided, based on market depth, liquidity, and credit fundamentals.
• Key Observations:
  • Most issuers are state-owned enterprises (SOEs) or local SOEs.
  • The selected issuers are in critical sectors like utilities, integrated oils, and power generation.
  • Local ratings are generally "AAA", but this does not necessarily imply strong credit quality due to limited differentiation by local rating agencies.
  • 3-month interbank certificates of deposit (NCDs) are considered attractive.

3. South Africa: Facing Extremes

• FX Outlook: The ZAR is expected to strengthen due to high local rates amid lower US rates.
• Positioning: Short USDZAR spot and long USDZAR put fly (12.50/13/13.50) are recommended.

4. Turkey: After the Referendum

• Short-Term Opportunity: There may be a brief window for buying Turkish USD bonds due to reduced FX risk.
• Long-Term Outlook: Local bonds are not valued highly in the medium to long term.
• Bond Recommendation: Buy Turkey $ 6% 2027s (spread over swaps), as they trade very cheap for their rating.

5. CEEMEA Credit: Buy Turkey $ Bonds

• Recommendation: Buy Turkey $ sovereign bonds due to reduced FX risk and cheap pricing.

6. Argentina: BNPP-LAI Strategy

• Indicator: A leading activity indicator (LAI) has anticipated economic turnarounds with an average lead of three months.
• Conclusion: A turnaround in economic activity has already begun.

7. Latam: Hedging Against Tail Events

• Hedging Strategy: Long USDBRL call spread (k=3.30/3.60) to hedge against geopolitical risks and social security reform challenges.
• Brazil: DI strategy update after April's Copom minutes; the Selic rate is expected to be cut to 8.00% by year-end.
• Colombia: Expected to cut policy rates by 25bp in April, though the pace may accelerate.

Key Recommendations

Summary of Trade Reviews

• Asia: No changes to trade recommendations; focus on growth data and potential impact of French elections.
• CEEMEA: Short USDZAR and long USDZAR put fly; buy Turkey $ bonds.
• Latam: Long USDBRL call spread; closed Chile CLPxCAM payer positions.

Key Events and Outlooks

Asia

• Next Week Highlights:
  • Trade data for Thailand and Hong Kong.
  • Industrial production data for Singapore and South Korea.
  • Singapore Monetary Authority analyst briefing.

CEEMEA

• Turkey: Central bank meeting on Wednesday; tight monetary policy expected to continue.
• Hungary: Central bank meeting on Tuesday; base rate likely to remain unchanged at 0.90%.
• Russia: Expected to cut rates again on Friday due to falling inflation.
• Poland: Inflation data on Friday; EURPLN may rise due to lower rate hike expectations.

Latam

• Brazil: March current account balance and credit report on Wednesday.
• Colombia: Central bank may cut rates by 25bp on 28 April.

Conclusion

The EM strategy team remains positive on EM assets, especially high-yield and reform-driven countries, and recommends a mix of FX hedges, credit bond purchases, and interest rate strategies to capitalize on the current environment of lower US rates and reduced FX volatility. Investors are advised to stay cautious as May may bring challenges.