20140619-巴黎银行证券-Latin_America_Weekly_Strategy_49页_3mb

Latin America Weekly Strategy Summary (Week of 16-20 June, 2014)

Core Content and Key Insights

• China's Rebalancing Policy: China is focusing on cleaning up its shadow banking system, which is beneficial for long-term development but a concern for commodity-dependent emerging market (EM) economies in the short to medium term. The strategy assumes no hard landing or sudden drop in growth.

• US Economy and ECB Policy: The US economy is accelerating with subdued inflation, while the ECB's supportive policy has a smaller impact compared to US quantitative easing (QE) and operation twist.

• EM Convergence to US Corporate HY: The scenario is for EM to converge to US Corporate High Yield (HY) and stabilize at current levels. Further improvement is possible only if the US 10-year yield remains around 2.45%–2.55% for a long period, though this is not the official BNPP scenario.

• UST Yield Volatility: The volatility of the US Treasury yield remains the most important exogenous factor affecting Latin America's risk assets. As long as it remains stable, EM assets are expected to stay supported.

• Structural View on Latam: The structural view is neutral for Latin America, except for Mexico linkers. There is no expectation of a new downward trend, but stabilization or small corrections are likely. Tactical opportunities exist in over/under-shooting instruments such as the Chilean Peso, Brazil DI, Brazilian Real, and Colombia Swap.

• Corporate HY Improvement: Corporate HY in emerging markets has improved significantly since 2008, but the impact of US 10-year yields on EM local markets and sovereigns is greater.

• Risk Premium Dynamics: The global risk premium is hovering around neutrality, with a "definition zone" where data-dependent dynamics are key. The probability of reversal is high when appetite is at extreme levels.

Key Data and Trends

• UST 10y Yield: The yield has been rising, with the current value at 2.64%.

• EMBIG Total Return Index: The index has shown a slight decline (-0.83%) this week, but it has increased over the past month and 3 months ago.

• EM Bond and Equity Flows: Institutional investors (excluding ETFs) have shown positive flows into Latam bond funds since March 2014, with a cumulative total of $1.09bn. Equity and bond flows combined reached $1.81bn since March 2014.

• Brazil DI and Swap Curve: Brazil's DI Jan-21 is over-extended to model fair value, with a target of 12.20%. The swap curve is flat at the long end, suggesting potential for tactical trades.

• Mexico Peso (USD-MXN): The peso has seen a slight increase, with a current value of 13.09. The spread between UST and TIIE is narrowing, indicating a positive impact on activity and cost of capital.

• Chilean Peso (USD-CLP): The peso is under pressure, with a current value of 562. A tactical short is recommended due to the price already reflecting a meaningful part of the negative scenario.

• Risk Positions:

  • Short USDBRL: Entered at 2.3001.
  • Long NTN-B May 2015 and Pay DI April-15: Expected to benefit from the convergence of EM to US Corporate HY.
  • Short USDCLP and NZDCLP: At 562 and 478.50 respectively.
  • Receive 18m IBR Swap in Colombia: Model-driven trade with a target of 4.37%.
  • Pay 5y Swap CLPxCAM: Target of 4.58%.

Closed Recommendations (YTD)

• Brazil DI Strategies:

  • 21 Feb 2014: Closed at +23bps.
  • 13 Dec 2013: Closed at +32bps.
  • 06 June 2014: Closed at +32bps.
  • 13 June 2014: Stop loss at -16bps.

• FX Strategies:

  • 27 Feb 2014: Closed at +2.50% on USDCLP.
  • 17 Jan 2014: Closed at +2.60% on BRLCLP.
  • 16 Jan 2014: Stop loss at -1.65% on USDMXN.

• Rates Strategies:

  • 01 Apr 2014: Closed at +14bps on Chile Swap.
  • 04 Apr 2014: Stop loss at -23bps on Brazil Cupom Cambial.
  • 16 May 2014: Closed at +25bps on Brazil and Colombia bond strategy.

Performance Metrics

• Total Trades: 14.
• Positive Trades: 10.
• Negative Trades: 4.
• Average Return per Trade: +35bps.
• Average Return per Positive Trade: +69bps.
• Average Return per Negative Trade: -55bps.

Economic Surprise Model

• Mexico GDP QoQ% SA: Weight 2, last model value (0.20), prior value (0.23), release 1.80.
• Colombia GDP YoY NSA: Weight 2, last model value 0.10, prior value 0.12, release 4.90.
• Brazil GDP YoY% NSA: Weight 2, last model value (0.67), prior value (0.79), release 1.91.
• Venezuela GDP % YoY: Weight 1, last model value (0.15), prior value (0.16), release 1.00.
• Mexico Industrial Production YoY%: Weight 2, last model value 0.35, prior value 0.20, release -2.22.
• Brazil CAGED (Job Creation): Weight 2, last model value (0.32), prior value (0.50), release 105,384.
• Brazil Tax Collection: Weight 1, last model value (0.05), prior value (0.07), release 105,884.
• Brazil Exports: Weight 1, last model value 0.02, prior value 0.03, release 20,752.
• Brazil Trade Balance: Weight 2, last model value 0.93, prior value 1.46, release 712.

Conclusion

• The Latin America market is expected to remain neutral with potential for stabilization or small corrections.
• Tactical opportunities are recommended in over/under-shooting instruments and specific regional markets.
• EM convergence to US Corporate HY is expected, with the US 10-year yield as a key driver.
• The risk premium is at abnormally low levels, with potential for reversal if it reaches extreme values.
• Institutional flows into EM bond funds have been positive, indicating a shift from fixed income to equity holdings.
• The market is in a phase of slow normalization of premium and cost of capital, supporting a tactical approach.