20140725-巴黎银行证券-EM_Strategy_Plus_34页_1mb

EM Strategy Plus Summary - 25 July 2014

Core Content Overview

This report provides an analysis of emerging market (EM) strategies, focusing on currency, local debt, and credit instruments. It highlights key views on various EM economies, asset allocation shifts, and trade reviews for the week of 25 July 2014.

Key Views and Asset Allocation

Korea

• Korea's headline current account surplus is the largest in 15 years, but it is overstated due to the smoothing of past shipbuilding orders that have already been FX hedged.
• New shipbuilding orders are slowing, which is more indicative of FX flows than the headline surplus.
• FX flows are not supported by the current account surplus, as the real surplus is closer to 1.5% of GDP, down from 5% of GDP in Q4 2013.
• The KRW is still supported by positive real rates and a modest current account surplus, but the "undervalued" label is unwarranted.
• Aggressive rate cuts and fiscal expansion could affect the won's value.

Indonesia

• The IDR has staged a relief rally following the resolution of election uncertainties.
• We expect the spot to revert to the 11500-11800 trading range.
• We increase allocation to IDR bonds due to fiscal reform prospects, benign inflation, and high yield levels.
• We do not expect continued appreciation at these levels.

CNY

• We are taking profit on the CNY repo-NDIRS 1y receiver at 3.80%.
• The liquidity squeeze from China's IPOs is fading, but growth data are improving.
• The PBoC may return with repo operations.

Crossover Investment in EM

• Crossover investment into EM has remained strong in 2014, despite political and economic uncertainties.
• We estimate such flows are equivalent to at least 20% of net new investment into the hard currency bond space.
• There are compelling reasons to believe that crossover money will remain in EM through 2015.

Regional Insights

Asia

• Increased portfolio allocation for Indonesia.
• CNY repo-NDIRS 1y receiver trade closed at 3.80%.
• The IDR is expected to trade within a narrower range after the relief rally.
• South East Asian markets will be closed for Hari Raya Puasa holidays.
• China's PMI data on 1 August will confirm growth momentum.

CEEMEA

• The rouble is expected to underperform its CEEMEA peers due to ongoing sanctions and geopolitical uncertainty.
• We recommend steepening the HUF FRA curve from 27bp to 60bp.
• We also recommend a 2s5s ZAR IRS steepener, targeting a move to 95bp.
• In Poland, we recommend buying POLGB bonds for the years 2018 and 2023.

Latam

• Brazil's inflation is expected to remain "resistant" for the next few quarters.
• The DI curve's long end is at abnormally low levels, and we expect the central bank to remain on hold.
• In Mexico, we maintain a long position on UDI's 2y and TIIE 2y due to supportive price dynamics.
• In Chile, we entered into a steepening trade (5y1y swap CLPxCAM).
• Argentina's default probability has increased to 50%, and we recommend buying USD-denominated bonds.

Trade Review

Conclusion

• Korea's current account surplus is overstated due to the smoothing of past shipbuilding orders.
• FX flows are more indicative of new order flow, which has slowed in Q2.
• Indonesia's IDR is staging a relief rally, with a higher allocation to IDR bonds.
• Crossover investment in EM remains strong and is expected to stay through 2015.
• The won is still supported by positive real rates and a modest surplus, but its value is not significantly undervalued.
• The IDR is expected to trade within a narrower range, with no continued appreciation at current levels.