20140404-巴黎银行证券-EM_Strategy_Plus_15页_1mb

EM Strategy Plus Summary - 4 April 2014

Core Content Overview

This report outlines the current state of emerging market (EM) strategies, focusing on asset allocation, trade reviews, and key market dynamics. It emphasizes the potential for rotation back into EM assets, driven by improved risk premia and changing investor sentiment. The report also highlights the role of US interest rate expectations and currency performance in shaping EM strategies.

Main Points and Asset Allocation

Emerging Market Fixed Income Performance

• EM fixed income performance in Q1 2014 was better than expected, with indices returning around 2%.
• This was a recovery from the sharp sell-off in January, which saw losses of 10% or more in several EM currencies.
• The main risk to EM assets remains the potential for further upward pressure on funding costs due to rising developed-market rates.

FX Performance and Outlook

• The HUF and RUB are identified as high-beta currencies that have underperformed year-to-date, despite improved FX funding conditions.
• The Turkish lira (TRY) has seen a strong recovery, but this may be limited if the Central Bank of Turkey (CBRT) eases policy.
• The Mexican peso (MXN) is slightly undervalued, but its technical position and foreign debt share may limit support.
• The Brazilian real (BRL) has outperformed other sovereigns, but investors are cautious due to election-related volatility.

Regional Focus

• China: Policymakers are concerned about growth but not excessively so. Q2 growth is expected to stabilize, but real estate developments may keep rates low. Recommend maintaining 5y repo-NDIRS receivers and Shibor-repo spread wideners.
• Korea: The KTB bond auction on 7 April is expected to be well-subscribed.
• South Africa: SARB is unlikely to hike rates as much as priced in, and USDZAR may rise in the medium term.
• Hungary: General election on 4 April is unlikely to have a major impact. The NBH is expected to delay rate hikes, and we remain overweight HUF.
• Russia: Despite worsening fundamentals and political risks, the rouble (RUB) is supported by the Central Bank of Russia (CBR). Recommend paying front-end RUB rates.
• Turkey: Recommend paying 3m/12m TRY-USD x-ccy swap spread and buying TURKEY’41 while selling 3.2xTURKEY’04/18.
• Poland: MPC is expected to keep rates unchanged, but the Ukrainian crisis may affect activity. Recommend receiving 2s5s10s PLN vs EUR.
• Asia and Latam: The coming week includes several economic and political events, including China's March trade data and India's general election. These may impact investor sentiment and flows.

Key Trade Recommendations

Inflows and Outflows

• EPFR data shows a second weekly inflow into EM bond funds in the week to 2 April.
• Inflows into EM equity funds have not been seen since November 2013.
• Despite headwinds, EM assets have become more attractive due to higher risk premia compared to the beginning of the year.

Risks and Outlook

• US Rate Outlook: The main risk to EM assets remains the trajectory of US yields, which could impact EM FX performance.
• Political Risks: Upcoming elections in Indonesia, India, and Hungary may influence market sentiment and flows.
• Currency Volatility: EM currencies are still sensitive to US rate changes and global risk sentiment.
• Emerging Market Fundamentals: While some countries (like Russia and Hungary) are facing challenges, others (like Turkey) are showing signs of recovery.

Summary of Key Views

• Emerging markets are showing signs of rotation back into fixed income and FX.
• HUF and RUB are underperforming despite improved FX funding conditions.
• TRY recovery is strong but may be limited by CBRT policy.
• The MXN is slightly undervalued, but technical and foreign debt issues may restrict its performance.
• China's real estate sector is a key concern, but growth stabilization is expected in Q2.
• EM FX is influenced by both macroeconomic factors and portfolio flows.

Conclusion

The report suggests a cautiously optimistic outlook for EM assets, driven by improved risk premia and changing investor flows. While US rate expectations remain a critical factor, EM currencies like HUF and RUB are still underperforming. The report recommends strategic positions in several EM markets, with a focus on FX and local debt instruments. Political events and macroeconomic data will continue to shape market dynamics in the coming weeks.