20170519-法国巴黎银行-EM_STRATEGY_PLUS_28页_2mb

EM Strategy Summary - 19 May 2017

Core Content

This document outlines the Emerging Markets (EM) strategy for May 2017, highlighting the challenges faced by EM markets and providing recommendations for investment in various regions including Asia, CEEMEA, and Latin America (Latam). It also discusses the implications of the newly announced "Bond Connect" scheme in China and the impact of political developments in the US and Brazil on EM performance.

Main Points

• May as a Challenging Month: May has historically been a tough month for EM, with performance often declining after a strong start. This year, the decline is attributed to liquidity tightening in China and political uncertainties in the US and Brazil.

• Global EM Environment: The outlook for EM over the coming months is more challenging, with the risk of lower returns. The focus is expected to shift to the balance sheet reduction by the US Fed and ECB in 2018 and beyond, which could impact liquidity and EM asset performance.

• China: Bond Connect:

  • The PBoC and HKMA have announced the "Bond Connect" scheme, which will initially allow "northbound" trading in the interbank bond market.
  • This scheme is seen as a supplement to the Direct China Interbank Bond Market (Direct CIBM) programme, aiming to attract new offshore investors.
  • The scheme is expected to be launched in July 2017, on the 20th anniversary of Hong Kong's handover.
  • Eligible investors are the same as those under Direct CIBM, and the new system will provide a more accessible channel for overseas investors to trade, clear, and settle Chinese bonds in offshore markets.
  • The Bond Connect system is designed to enhance the internationalization of the RMB and facilitate access to the Chinese bond market for global investors.

• CEEMEA: Decreasing Profits, Increasing Positioning:

  • EM portfolios are more vulnerable due to trimmed profits.
  • A recommendation is made to buy a 2m EURPLN call spread (strikes 4.30/4.25) with a cost of 35bp.
  • There is a risk of further EUR strengthening against CEE currencies due to shrinking rate differentials.

• Brazil: Interest Rate and FX Strategy:

  • The recommendation to receive DI Jan18 is based on the attractive risk-reward from current interest rates.
  • The Brazilian Central Bank increased FX swap stock, indicating potential intervention in the currency market.
  • A short USDARS 1m NDF is recommended, with an entry level of 16.13.

• Mexico: Technical Positioning Update:

  • Non-residents' share of the local public debt market decreased slightly from April to May.
  • The recommendation includes a short USDARS 1m NDF and a long USDARS 1y NDF against short USDARS 3m NDF.

Key Information

• New Recommendations:

  • Receive DI Jan18: USD 40k notional, entry level 10.02%, target 9.30%, stop 10.63%.
  • Sell USDARS via 1-month NDF: USD 10mn notional, entry level 16.13, target 15.65, stop 16.53.
  • Buy 2m EURPLN call spread: USD 20mn notional, strikes 4.30/4.25, cost 35bp.

• Trade Review:

  • Interest Rates: Pay 6x9 RUB XCCY (carry +20bp), Pay 2m1m TRY forward rate, Receive 2Y1Y THB NDIRS, Pay 1Y1Y RUB XCCY, Receive DI Jan18.
  • FX: Sell 3m USDPHP NDF, Sell PLNHUF, Sell 3m USDCNHN, Short USDARS 1m NDF.
  • Options: Buy 2m EURPLN call spread, Buy 2m USDZAR put fly, Long USDHKD call spread, Short USDBRL via 1m NDF, Long USDBRL CS.
  • Credit: Switch from Oman $ '27s into Turkey $ '27s, Sell Brazil 5Y CDS, Switch from Saudi Arabia $ '46s into Qatar $ '46s.

Outlook

• EM flows are expected to return soon, supported by a widening carry differential versus US yields.
• China's economy is projected to grow solidly, though at a slower pace than before.
• Political developments in Brazil may lead to a shift in portfolio flows, with higher-yielding EM markets experiencing sell-offs.
• The low-yielding CEE region is seen as a safe haven.
• The OPEC meeting on 24-25 May is expected to prolong the oil production cut, which is supportive for oil-producing countries.
• The Hungarian central bank is likely to keep policy rates on hold, with the risk of a flattening curve due to EUR strength and inflation expectations.

What's Up Next Week

• Asia: Key data releases in Singapore and South Korea, including inflation and industrial production data. Policy rates are expected to remain unchanged in Thailand and South Korea.
• CEEMEA: South Africa's CPI data and SARB policy decision, expected to keep repo rates unchanged. Hungary's base rate is also expected to remain unchanged.
• Latam: Mexico's GDP and CPI data will be released, while Brazil's inflation data is expected to show a deceleration. Colombia's central bank may cut policy rates by 50bp.