20130927-巴黎银行证券-EM_Strategy_Plus_13页_902kb

EM Strategy Plus Summary - 27 September 2013

Core Content

This document provides a weekly strategy update for Emerging Markets (EM) investments, focusing on interest rates, foreign exchange (FX), and credit markets. It outlines the current market sentiment, key asset allocations, trade recommendations, and analysis of economic and central bank developments.

Main Views and Asset Allocation

• Investors have increased rates duration since the FOMC meeting, but this has not been uniform across EM markets due to underperformance in beta.
• Despite persistent fundamental issues, investors are expected to reassess their underweight positions in EM and increase exposure and duration.
• Relative performance across curves and markets is the key focus, with longer-duration bonds seen as more attractive due to steepening credit spreads.
• Russia remains the largest overweight in the portfolio, followed by Thailand, Mexico, and Poland.
• Malaysia remains the largest underweight due to its weak fundamentals and the lack of foreign demand for local debt.

Key Trade Recommendations

FX Market Outlook

• Asia FX is expected to benefit from improving export growth to the low double digits by year end, particularly in North Asia (KRW and TWD), which should be insulated from the unwinding of QE.
• Sell USDINR as it is the least bad of the problem-child currencies.
• Buy CZKHUF as the CZK is expected to rise against the HUF due to the latter facing growing risks.
• Positive on the PLN with a target range of 4.00-4.10, supported by economic surprises and a flattening curve.
• Neutral on Brazil, underweight on Hungary, Turkey, and South Africa due to central bank complacency and large imbalances.

Credit Strategy

• Extending duration on steep credit curves is the preferred strategy, as credit spreads have been under steepening pressure.
• Top switches in 10s30s and 5s10s segments are based on a model that optimises yield and convexity pickup per unit of duration.
• Qatar's long end of the curve (QATAR '40) is highlighted as a top switch, with the QATAR '15 bond trading at a bid z-score of -1.5.
• Croatia '23 CDS has shown a positive move, while SOAF '41 is being switched into SOAF '25.
• Technical factors and fundamental analysis are both used to inform credit decisions, with technicals showing more consistent results in some cases.

Key Risk Events

• The Fed's data-dependent tapering is expected to lead to adjustments in fixed income and EM allocations.
• US non-farm payrolls, eurozone PMIs, and Chinese PMIs will be key data releases in the coming week.
• China's Shanghai Free Trade Zone launch and interest rate liberalisation are expected to impact liquidity and FX markets.

Portfolio Adjustments

• Reduced exposure to Indonesia due to supply pressures and low foreign demand.
• Increased overweight in Poland due to improving economic indicators and a flattening curve.
• Maintained positions in other markets, including a short EURRON and positive stance on ROMGBs.

Fundamentals vs. Carry

• Fundamentals are not the main driver of credit spreads currently, with technical factors playing a larger role.
• Real rates are expected to decline into year end, which supports the idea of extending duration in EM credit.
• Strong fundamentals in countries like Russia and Thailand make them attractive for long-term investment, despite current market pressures.

Charts and Models

• Chart 1 shows that fundamentals are not equally reflected in credit spreads, with some countries (e.g., Romania, South Africa) having tighter spreads despite similar fundamentals.
• Chart 2 highlights the technical view that countries above a certain line have tighter credit spreads, with Hungary and Turkey being notable examples.
• Chart 3 and Chart 4 provide insights into leverage ratios and convexity pickup, supporting the extension of duration in EM credit markets.

Conclusion

The strategy emphasizes duration extension in EM credit, FX trades based on improving export growth, and reduced exposure to certain EM assets due to supply pressures and weak fundamentals. The Fed's data-dependent approach and China's policy initiatives are key drivers of market sentiment, with Asia FX expected to benefit from global economic recovery.