20140527-法国巴黎银行-Latin_America_Weekly_Strategy_56页_1mb

Latin America Weekly Strategy Summary - Week of 27 May, 2014

Core Content and Key Observations

Changes Since December 2013

• UST 10y Yield: The UST 10y yield has dropped from 3.04% in December 2013 to 2.54% in May 2014, showing a decrease of 50 bps. This indicates a more accommodative US monetary policy.
• Rotation from EM to DM: The rotation from Emerging Markets (EM) to Developed Markets (DM) has stopped, with a noticeable shift in flows towards EMs.
• Liquidity: Liquidity concerns have eased, with no sign of shrinking. In fact, anecdotal and official data suggest increased liquidity flow into EMs.
• Investor Behavior: There is a renewed search for yield, with investors shifting from EM to DM and back, but the trend has turned in favor of EMs.
• Market Trends: The US equity market has shown resilience, with the S&P 500 rising to 1,900 from 1,775. US Corporate HY BBB 10y yield has dropped to 3.85% from 4.51%, indicating lower risk premium.

Flows Analysis

• EM to Latam: The flow from EMs to Latin America (Latam) has improved significantly since January-February 2014.
• Latam Inflows: Portfolio flows into Latam have shown a steady increase, with a focus on fixed income and equities.
• Brazil, Mexico, Colombia: Brazil and Mexico have seen positive inflows, with Brazil showing a notable rise in equity and bond flows.
• Emerging Markets: Inflows into EM equity ETFs have increased, suggesting a broader trend of EM investment.

UST 10y Impact on Latam

• A lower UST yield has triggered a search for yield among EMs, with FX high yielders outperforming.
• The US flattening yield curve has led to a flattening of the local rate curve in Latam.
• The correlation between EMBIG and SP500 has reached a high, indicating a strong link between EMs and the US market.

Global Risk Premium

• The global risk premium has been relatively stable, with the US market showing resilience and a focus on yield.
• The risk premium is not expected to rise significantly in the short term, as UST yields remain stable and accommodative.

Political Risk in BRL

• The Brazilian Real (BRL) has embedded some political risk, but it is not currently at a high level.
• The BRL's correlation with the US dollar and other currencies is a key factor in its valuation.

BRL Strategy

• The BRL has been analyzed in terms of its carry and risk premium.
• A short position in USDCLP and a long position in Colombia 23s with a short in Brazil 23s is suggested.
• The BRL swap curve is considered too flat, with a focus on the long-end.

Brazil Domestic Rates Scenarios

• The document outlines potential scenarios for Brazil's domestic rates, emphasizing the need for a careful approach.
• The swap curve is expected to flatten further, with the potential for yield curve inversion.

El Niño Impact

• The potential impact of El Niño is considered, with a focus on its effect on commodity prices and economic activity.
• The document suggests that the scenario is still uncertain, but it could influence EM dynamics.

Brazil Swap Curve Analysis

• The swap curve for Brazil is analyzed, with a focus on the long-end.
• A short position in USDCLP and a long position in Colombia 23s with a short in Brazil 23s is recommended to hedge against UST yield spikes.

CLP and MXN Model Update

• The model has been updated for CLP and MXN, with new scenarios and a focus on the relationship between these currencies and the US dollar.
• The model suggests that these currencies are still in a favorable position for investment.

Key Information and Strategic Insights

• Current Positions:
  • Short USDCLP
  • Long Colombia 23s, short Brazil 23s
  • Pay rates Swap CLPxCAM 3y, receive rates Swap CLPxCAM 5y
  • Pay rates Swap CLPxCAM 10y (model-driven)
• Performance:
  • Took profits at +23bps on May 21
  • Took profits at +25bps on May 16
  • Took profits at +14bps on May 19
• Trends:
  • The trend of rotation from EM to DM has stopped
  • Inflows into EM equities and fixed income have increased
  • The US market is still in a recovery phase, with some signs of plateauing due to weather effects
  • The economic cycle is entering an expansion phase, as indicated by the swirlogram
• Model Insights:
  • The model is pointing to a positive trend since March 2014
  • The model is based on a combination of 100+ economic indicators
  • The model's theoretical level for DI Jan-21 is at 12.50% (-9bps from one week ago)
  • The model's theoretical level for DI Jan-17 is at 12.18% (-7bps from one week ago)

Conclusion

• The Latin America market remains a key area of interest for investors, with a focus on the search for yield and the impact of US monetary policy.
• The current strategy suggests a balanced approach with both long and short positions, based on the analysis of the swap curve and the broader economic indicators.
• The market is expected to remain stable with a focus on EMs, as the US remains accommodative and EMs show signs of improvement.