BofAML Emerging Convictions: Oktoberfest

Redacción - Jueves, 08 de Octubre

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•A catalyst such as strong Chinese manufacturing or improved DM liquidity, is required for a sustained recovery of EM assets. • In Asia and EEMEA, we are cautious on the outlook of the EMFX rally. We favor local rates and bonds given room to ease. •  Weaker fiscal balances largely explain the steepness in the long end of Latin American curves.

Global Outlook: DC moves to Lima

EM assets appear undervalued, but a catalyst such as stronger manufacturing in China or improved DM liquidity conditions will be required for a sustained recovery. Until then, EM asset prices will likely remain volatile. Widening output gaps and low inflation should allow EM central banks to maintain an easing bias.  (A. Ades, P. Villanueva; page 2)

Asia central banks: haves, have nots and maybes

Most Asian central banks are likely to persist with their dovish stances, but to different degrees. The current rally in EM assets is just short covering, in our view, and we suggest using any dips in USD/Asia to go long USD again. We recommend receive 1y KRW NDIRS versus 1y USD IRS and pay 5y USD IRS vs CNY NDIRS.  (R. Garg; page 8)

EEMEA: be happy but do worry

The rally in EEMEA FX fits our baseline but is running on one leg and risks getting out of breath. Rates remain in a sweet spot. Buy the laggard PLN in FX; stay long rates/bonds across EEMEA.  (A. Sen; page 10)

LatAm: the fiscal connection

Weaker fiscal balances largely explain the steepness in the long end of Latin American curves. However, we find that Colombia is excessively steep and that Chile is not steep enough. Mexican and Peruvian slopes are only modestly steeper relative to their equilibrium levels. (C. Irigoyen, E. Aguirre; page 12)

Relative Value: high beta LatAm ideas

In Venezuela, we see potential for a transition to a more market friendly government after the elections, but investors remain focused on low oil prices. We prefer Ven 19s versus Ven 20s in the short end. In Argentina, we expect the next administration will improve economic policies and negotiate with holdouts, but in a very challenging macro environment. We like Discos versus Pars if investors are seeking to leverage potential negotiations with holdouts. (J. Brauer, S. Rondeau; page 14)

What we like

FX: The recent rally has been driven by high-carry currencies. However, we expect that in the medium-term fundamentals will dominate. We remain bearish on currencies of commodity exports. We favor long USD/PEN 1x12 forward points.

LDM: Reduced volatility, contained inflation, and sluggish growth, supports our constructive view on local rates. We favor receivers in Korea's front end (1y KRW NDIRS vs 1y USD IRS) and Brazil's (Jan17). We also like long positions in the long end of curves in Poland (POLGB 2025s), Israel (ILGOV 2025s), Hungary (HGB 25B) and India (10y IGB). We like long-term receivers in South Africa (10y IRS).

EXD: We are cautious as EM spreads rallied last week but risks remain elevated. We overweight Indonesia on reforms outlook. We remain underweight Ukraine after a large rally and Turkey on political risks. We stay underweight Peru and Philippines on tight valuations

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