20171117-法国巴黎银行-EM_STRATEGY_PLUS_23页_2mb

EM Strategy Summary - 17 November 2017

Core Content

This document outlines the Emerging Markets (EM) strategy update from BNP Paribas and its regional branches, focusing on market risk, trade recommendations, and political developments in South Africa. It also includes insights on China, Brazil, and Latin America (Latam) markets, along with a risk index update and analysis of risk appetite.

Main Themes and Key Insights

Market Risk Update

• Market risk has corrected from record low levels to neutral.
• Further correction is possible, but likely to be less significant than in the previous three weeks.
• The risk index is now available on Bloomberg with the code <BNPSGRX Index>, and the risk premium model is also available with <BNPSGRP Index>.

Trade Recommendations

• Asia: No changes to trade recommendations this week.
• CEEMEA: No changes to trade recommendations this week.
• Latam:
  • Took profits on the USDBRL call spread hedging structure.
  • Maintained a long position in BRL against a basket of currencies (CLP, EUR, AUD).
  • Paying rates in Chile and Colombia.
  • Long USDARS via 3m NDF.
  • Short USDCCOP via 3m NDF.
  • Long USDMXN OT @ 20.00.

China

• Tightening financial conditions are starting to have an impact.
• Mortgage lending slowdown and downside data surprises indicate economic pressure.
• Bond yields have risen to 4%, reaching a three-year high.
• Leverage in the bond market is decreasing, and NBFIs are exiting carry trades.
• For investment books, long-duration bonds (e.g., 10-year Chinese Development Bank bond) are seen as good value.
• For trading books, swap rates are not yet attractive enough to take positions.

South Africa

• The African National Congress (ANC) leadership contest is ongoing.
• No clear winner yet, with Cyril Ramaphosa and Nkosazana Dlamini-Zuma as leading candidates.
• The leadership will be decided at the national conference scheduled for 16-20 December.
• The ANC is expected to name the top leadership on 18 December.
• Branches are struggling to meet quorum, with KwaZulu-Natal leaning towards Dlamini-Zuma.
• Delegates and candidate support figures are outlined in a table, indicating Dlamini-Zuma and Ramaphosa are the main contenders.

Brazil

• The team took profits on the long USDBRL 3.175x3.35 call spread.
• The social security reform is a key focus, with a partial cabinet reshuffle expected to strengthen the government's position.
• The central bank is expected to keep rates on hold and raise medium-term inflation estimates.

Colombia

• Foreign investors have increased their share in the local government market since March 2016.
• Non-resident debt holdings represent 45.1% of Colombia's international reserves.

Mexico

• The team is long in the short end of the TIIE curve.
• The central bank is expected to adopt a neutral stance on monetary policy.
• The bi-weekly CPI release on 23 November is expected to attract investor attention.

Risk Appetite and Market Dynamics

• Risk is considered structural, while risk appetite is cyclical and changes rapidly.
• The risk index suggests that the probability of a market sell-off due to a reassessment of risk is balanced.
• The team uses the risk premium model to infer risk appetite, based on the correlation between asset risk and excess returns.
• The model uses Spearman rank correlation to account for non-linear relationships and extreme values.

Key Data and Charts

• Chart 1: Risk index since 2015.
• Chart 2: Historical distribution of risk values and duration of risk cycles.
• Chart 3: Mortgage lending slowing sharply.
• Chart 4: Repo trading volume has stopped increasing.

Outlook for the Next Week

• Asia:

  • Thailand's Q3 GDP release (20 November) is the most important.
  • Malaysia's CPI release (22 November) could influence the central bank's policy.
  • Singapore's GDP data (23 November) may show stronger growth than expected.

• CEEMEA:

  • South Africa's inflation data (22 November) and central bank meeting (23 November) are key.
  • S&P and Moody's credit rating reviews (24 November) may impact market sentiment.
  • Hungary's central bank is expected to keep rates unchanged.

• Latam:

  • Brazil's mid-month inflation data (23 November) and reform discussions are important.
  • Mexico's CPI release and monetary policy meeting minutes will be closely watched.

Conclusion

• Despite the correction in market risk, the EM strategy team remains cautious and does not expect a regime switch in EM and risk assets.
• The team maintains a long position in BRL, Mexican rates, and other assets, while being short in USDARS and USDCCOP.
• The current market environment is seen as a transition from caution to some relief, but further volatility is expected.