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EM Strategy Plus Summary

Core Content Overview

This document outlines the key views and asset allocation strategies for Emerging Markets (EM) from BNP Paribas, focusing on FX, local debt, credit, and sovereign risk. It highlights the resilience of EM despite multiple headwinds and suggests a cautious approach to market participation, with a preference for shorting and tactical trades.

Main Views and Asset Allocation

Emerging Markets Resilience

Despite facing various risks, emerging markets have shown strong performance. The market behavior resembles the capitulation of short positions, indicating that many investors may be unwinding their bearish stance.

• Key Risks Identified:

  • Geopolitical tensions in Ukraine and Russia
  • China's economic slowdown and its impact on EM assets
  • Rating actions (e.g., Brazil and Russia)
  • FOMC decisions and US rate expectations

• Recommendation:

  • Reduce bullish positions into strength
  • Look for opportunities to establish short positions at better levels

FX and Credit Strategy

• KRW (Korean Won):

  • The USD/KRW pair is expected to break to the top due to the "if it can’t go down, it can only go up" logic
  • Foreign equity and domestic portfolio outflows are balancing out Korea's current account surplus

• MYR (Malaysian Ringgit):

  • Bullish against THB in the short term, but bearish over the next 12 months
  • Recommend buying 3m 25-delta USD/KRW risk-reversals

• TURKEY:

  • Recommend buying TURKEY'41 and selling 3.2x TURKEY'04/18
  • Overweight long end of the credit curve

• RUSSIA:

  • Sell RUSSIA'43 and buy 1.8x RUSSIA'23
  • Buy 5y Russian CDS

• Brazil:

  • Recommend receiving 1y1y NDIRS (interest rate derivatives)
  • Hold DI Jan-15/16/17 fly position, expecting structural steepening

• South Africa:

  • Recommend switching out of SOAF'41 into ROMANI'44
  • Pay 5y ZAR IRS

• Mexico:

  • Structurally positive on MXN but lacks a short-term trigger
  • Recommend trading 1y-5y tenors of the IRS curve

• Hungary:

  • Long PLNHUF
  • Long HGB 20/A via ASW

• Indonesia:

  • Turned neutral on IDR bonds
  • Wary of excessive optimism due to weak commodity prices

Key Recommendations

Upcoming Risk Events

• Turkey: Local elections on 28 March, with the possibility of continued political noise
• Indonesia: March CPI and February trade data to be released, which could influence market sentiment
• South Africa: Expectation of more rate hikes, with the curve still mispricing tightening
• Mexico: Market has already priced in much of the good news, with focus on UST dynamics
• Brazil: Election mood may increase volatility, with a focus on 1y1y NDIRS and DI curve

Conclusion

The EM market is currently showing resilience, with a balanced approach between foreign equity outflows and domestic portfolio shifts. The document suggests that while the market may not be in a full-blown crisis, it is displaying complacency. The strategy emphasizes the importance of tactical trades and short positions, especially in the context of a possible top-side break in USD/KRW. The focus is on managing risks while capitalizing on the current market dynamics.