20140703-巴黎银行证券-Latin_America_Weekly_Strategy_63页_5mb

Latin America Weekly Strategy Summary - Week of 30 June-4 July 2014

Core Content

• IIQ 2014 Performance: IIQ 2014 was one of the best quarters in the last ten years, with broad-based improvement.
• IIH 2014 Outlook: The rally observed over the last 3 months is expected to lose steam, leading to more corrections and risk-off periods. Cross-correlation will be lower, creating opportunities for RV (relative value) strategies.
• Risk-taking Scenario: The current favorable risk-taking scenario is not a structural break but a tactical one. A normalization of premium/cost of capital is at its initial stages.

Key Factors

• UST Yield Volatility: The most important exogenous factor is the volatility of U.S. Treasury yields. As long as this remains stable, Latin America risk assets will be supported.
• China's Economic Transition: China is pursuing a rebalancing policy, which involves cleaning up the shadow banking system. This is a concern for commodity-oriented EM economies, but not expected to result in a hard landing.
• Latam Structural View: A neutral stance is expected for Latin America, except for Mexico and Brazil linkers. Stabilization or small corrections are anticipated, not a sell-off.

Risk Aversion Analysis

• Risk Aversion Levels: Economic agents are in a risk-taking or neutrality mood, with the current cycle not particularly abnormal compared to past ones.
• Probability of Correction: The probability of correction or plateauing is at 75.3%, indicating a potential turning point.
• Index Components: VIX, SOX, USD-BRL, FX Risk, Sov Credit Risk, etc., show varying degrees of change, with VIX and FX Risk trending upward.

Macroeconomic Landscape

• USA Growth Model: The U.S. growth model, based on 25 economic indicators, shows a recovery despite a drop in February (weather effect). The Conference Board Leading Indicator and the model point to an acceleration in CAPEX.
• China Indicators: China's growth model is at 7.47%, with expectations of stabilization at 7.25% - 7.40%. Key indicators include China Value Added of Industry, FDI, Total Loans, and PMI.

EMBIG and UST Yield Impact

• EMBIG Diversified Index: The EMBIG Total Return Index has shown steady growth, with a current value of 685.0.
• UST Yield Influence: The U.S. Treasury yield, especially the 10-year yield, has a significant impact on EM sovereigns and EM Corporate in USD, more so than on U.S. Corporate HY.
• Spread Analysis: The spread between EM Corporate in USD and U.S. Corporate HY has remained relatively constant. The spread between EM Sovereign and UST 10y yield is also a key factor.

Correlation Analysis

• Rolling 30d Correlation: The correlation between risky assets (excluding FI and VIX) and UST 10y yield is a key determinant of EM performance.
• EMBIG and UST: The correlation between EMBIG and UST 10y yield is positive and significant, indicating that EM performance is closely tied to U.S. Treasury yields.
• Other Assets: EEM, Copper, OIL, and other assets show varying levels of correlation with UST and BUND, with EMBIG showing a stronger link to UST.

Recommendations

• Brazilian Swap Curve: The Brazilian Swap Curve is too flat; pay rates DI Jan-18 and receive rates DI Jan-16 are recommended.
• DI Jan-21: DI Jan-21 is over-extended and is expected to correct, with a target of 12.20%.
• Currency Positions: Short USDBRL 3m NDF (entered @ 2.3001), short TRY/BRL (*), and long NTN-B May 2015 and Pay rates DI April-15 @ 6.13% are suggested.
• Inflation: Long 1y break-even inflation is recommended due to the current low volatility and potential for correction.

Conclusion

The Latin America market is expected to stabilize or experience small corrections in the second half of 2014. The U.S. Treasury yield volatility remains a key driver, and while the current risk-on environment is favorable, it is not a structural shift. A tactical approach is advised, with an emphasis on relative value strategies and monitoring the impact of U.S. rate changes on EM assets.