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Emerging Markets Weekly Summary (15 October 2018)

Core Content

This report provides an overview of emerging markets (EM) activity, focusing on economic developments, central bank actions, and portfolio flow strategies. It includes trade ideas, performance metrics, and forecasts for key economies such as Brazil, Argentina, India, and others.

Main Views and Key Information

1. South Africa

• Political Context: The removal of Nhlanhla Nene and appointment of Tito Mboweni as Finance Minister is expected to provide market stability ahead of the medium-term budget.
• Currency Outlook: The ZAR is expected to appreciate in the short term due to improved policy sentiment.
• Trade Position: A short USDZAR position via 3m Fwd has been taken, with a profit of 1.11% and a total profit since inception of 111bp.

2. Brazil

• Interest Rate Strategy: The FRA Jan-21s-20s reached a target of 10%, with the strategy extended to 9.75% for 50% of the allocation.
• Trade Performance:
  • A trade to receive Brazil DI Jan20s-Jan21s FRA has gained +57 bp, with a total P/L of 842 bp since inception.
  • A trade to receive Brazil DI Jan22s-Jan23s FRA reached target of 11.75% with a profit of 212 bp.
• Central Bank: The Central Bank of Brazil (CBR) kept rates unchanged at 6.50% in September, with no expected changes in 2018. The next meeting is scheduled after the election.

3. Argentina

• Trade Performance: A short USDARS NDF position has been closed with a 4.7% profit (mat. 05-Nov). Total performance since June 2018 is over 22.1%.
• Currency Strategy: A long 5y CDS position is maintained in relative value against other countries.

4. India

• Central Bank Action: The RBI voted 5-1 to keep the repo rate unchanged at 6.50%.
• Inflation Forecast: Inflation is expected to rise, with a potential 25bp hike in December 2018.
• FX Strategy: A short USDIDR via 3m Fwd has been initiated, with a current level of 15,700 and a target of 15,650, yielding a -1.23% P/L.

5. Singapore

• MAS Policy: The Monetary Authority of Singapore (MAS) slightly increased the slope of its S$NEER policy band to manage imported inflation and a small output gap.
• Tightening Outlook: The door for further tightening remains open in the coming quarters.

6. Portfolio Flow Model

• New Framework: A new model for EM portfolio flows was introduced, based on the work of Marco Lo Duca.
• Forecast: EM portfolio flows are expected to rise by USD30bn above the historical average in the next three months, equivalent to USD50bn for the next quarter.
• Performance: The strategy has reported a profit of +20bp on the India steepener.

7. FX Positioning

• Key Trades:
  • Short EURMXN via 3m Fwd has a profit of 1.93%.
  • Short EURCLP via 3m NDF has a loss of -2.32%.
  • Short USDCOP via 3m NDF has a loss of -4.60%.
• Currency Trends: The ZAR, MXN, and CLP are expected to weaken, while the BRL is seen as a potential beneficiary of rate differentials.

8. Central Bank Watch

Asia

• China: PBoC is expected to hold interest rates despite Fed hikes. The 1y bank lending rate is at 4.35%, with no expected changes through Q4 2019.
• India: RBI is expected to hike rates in December 2018, with inflation expected to rise to the top end of the 2-6% target.
• Indonesia: BI may raise rates by 50bp over the rest of 2018, possibly in two moves. If domestic NDFs improve IDR weakness, BI might not hike beyond 6.25%.
• Hungary: NBH is expected to keep rates on hold until the end of 2019, with a gradual and cautious normalization of monetary policy.
• Czech Republic: CNB is expected to raise rates by 25bp in November, following a 25bp increase in September.

CEEMEA

• Poland: NBP is expected to hold rates until the end of 2019, as inflation remains low and growth is modest.
• Turkey: CBRT raised the reverse repo rate by 625bp in September, with a forecast to cut rates in Q3 2019. The headline inflation rate rose to 24.52% in September due to energy and food prices.
• South Africa: SARB is under pressure to hike rates due to ZAR depreciation, but it may wait for the medium-term budget in late October before making a decision.

9. GDP Forecasts

• Global: Expected GDP growth of 3.8% for 2018 and 3.6% for 2019.
• Key Economies:
  • China: 6.4% (2018), 6.3% (2019)
  • India: 7.4% (2018), 7.6% (2019)
  • Brazil: 2.0% (2018), 3.5% (2019)
  • Mexico: 1.5% (2018), 3.0% (2019)
  • Argentina: 1.0% (2018), 0.0% (2019)
  • Poland: 4.5% (2018), 3.0% (2019)
  • South Africa: 2.2% (2018), 1.9% (2019)

Summary of Portfolio Flows

• New Model: A new framework for forecasting EM portfolio flows has been introduced, based on external shocks and macroeconomic indicators.
• Performance: Portfolio flows have shown positive returns, with notable gains in Brazil and India.
• Strategic Adjustments: Some trades have been taken to profit from rate movements, while others have been closed due to reaching targets or losing momentum.

Economic Calendar Highlights

• China:
  • CPI: Sep y/y (2.3% forecast, 2.4% BNP Paribas)
  • PPI: Sep y/y (3.2% forecast, 3.6% BNP Paribas)
• Other Asia:
  • Indonesia trade balance: -USD1bn
  • India wholesale prices: 4.5% (forecast)
• CEEMEA:
  • Poland CPI: 1.8% (forecast)
  • Turkey headline inflation: 24.52% y/y
  • Brazil economic activity: 2.6% y/y
• Latin America:
  • Argentina CPI: 34.40% y/y
  • Brazil services sector volume: 0.6% m/m
  • Mexico monetary policy minutes: expected on 15 November

Conclusion

The report highlights the ongoing dynamics in EM markets, with a focus on interest rate strategies, FX positioning, and central bank decisions. Despite global uncertainties, some EMs show signs of resilience and potential for appreciation, particularly in the context of policy normalization and trade adjustments. The introduction of a new portfolio flow model suggests a more data-driven approach to EM investment strategies.