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EM Strategy Summary - 12 May 2017

Core Content

This report provides insights and recommendations from the Emerging Markets (EM) Strategy team at BNP Paribas, covering liquidity conditions, FX and credit strategies, and market outlooks across key regions including China, Asia, CEEMEA, and Latin America (Latam).

Main Themes and Key Information

1. Liquidity Conditions

• Emerging markets have experienced four months of inflows, totaling USD 73bn, driven by loose global liquidity.
• The pace of these inflows may slow due to tighter liquidity conditions, including rising interest rates in China, a steepening EUR curve, and gradual hikes in the US curve.
• EM FX performance was relatively flat in April, which may signal a further slowdown, though inflows are still expected in May.
• Volatility indicators are at low levels, historically indicating a potential shift to negative flows if they remain low.

2. Asia FX: Seeing CLEERLY

• The CLEER™ model, a medium-term fair-value model for Asian currencies, is used to assess overvaluation/undervaluation.
• Recent depreciation of CNY and PHP has reduced their overvaluation, though further depreciation is possible.
• INR appears overvalued on a spot basis, but not at extreme levels.
• MYR and IDR remain the cheapest currencies.
• Cyclical currencies KRW, TWD, SGD, and THB have seen a rise in fair value due to improved global trade conditions.

3. New Trade Recommendations

4. CEEMEA

• Poland: The National Bank of Poland is expected to keep rates unchanged at 1.50%. The 5y5y rate is relatively tight and sensitive to European curve steepening.
• Q1 GDP for several CEE countries will be released, with expectations of growth acceleration.
• Oman faces a potential downgrade from S&P, which could impact its credit rating. The report recommends switching from Oman '27s to Turkey '27s due to concerns over oil prices and external debt.

5. Latam

• Mexico: Banxico is expected to raise rates by 25bp to 6.75%.
• Chile: The central bank is expected to keep rates on hold, with continued focus on paying 5y CLPxCAM.
• Brazil: The central bank may roll over USD 4.4bn of FX swaps maturing in June 2017. The team has increased DI Jan20 receiver position and taken profit on USDARS NDF payer.

Key Market Insights

• China: Despite an upward trend in rates, the recent sell-off may have been excessive. The report recommends tactically receiving into the market with a focus on 5y NDIRS and 5y CDB bonds.
• FX Market: The report highlights the importance of comparing forward pricing with the CLEER™ model forecasts to identify potential investment opportunities.
• Credit Market: There is a recommendation to switch from Saudi Arabia '46s to Qatar '46s, and to sell Brazil 5Y CDS.

Summary of CLEER™ Model Results

What's Up Next Week?

• China: New 3y and 7y CGB auctions are expected, with the PBoC likely to stabilize liquidity.
• Asia: Indonesia's central bank policy meeting and Q1 GDP data for several Asian economies will be key.
• CEEMEA: Focus on Poland's central bank meeting and Q1 GDP data, with continued monitoring of Oman's credit risk.
• Latam: Mexico's monetary policy meeting, Chile's rate decision, and Brazil's FX swap roll-over.

Strategic Highlights

• Asia: Tactically receive 5y CNY NDIRS and sell 3m USDPHP NDF.
• CEEMEA: No new trade recommendations.
• Latam: Pay 5y IBR in Colombia, increase DI Jan20 receiver position in Brazil, and take profit on USDARS NDF payer in Argentina.

Conclusion

The report emphasizes the importance of liquidity conditions in testing the stability of inflows to EM. It also provides strategic trade recommendations and insights based on the CLEER™ model, highlighting the need for investors to monitor macroeconomic fundamentals and adjust their positions accordingly.