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EM STRATEGY | GLOBAL WEEKLY - 15 December 2017 Summary

Core Content

This document is a comprehensive summary of the Emerging Markets (EM) Strategy for the end of 2017 and the beginning of 2018, authored by the EM Strategy Team at BNP Paribas, including insights from various regional experts. It outlines the performance of EM markets in 2017, the outlook for 2018, and provides specific trade recommendations.

Main Themes and Outlook for 2018

Asia

• Market Performance: EM financial markets have performed strongly in 2017, with MSCI EM up by 31%, EM credit by 8%, and local EM markets by 12%.
• Economic Growth: EM growth is expected to remain robust, reaching around 4.6% in 2017, which is higher than the 4.3% of the previous year and double that of developed markets.
• Key Themes for 2018:
  • Strong global growth and low G4 interest rates are expected to continue for the first four months of 2018, supporting EM fixed income and equities.
  • The 'Goldilocks' scenario may be challenged later in 2018 due to diminishing QE and higher valuations.
  • May is traditionally a difficult month for EM, with potential for volatility due to US trade-related news.
  • Inflation expectations may rise, impacting EM bond duration.
• RMB Outlook: The RMB is expected to remain strong, though volatility could challenge the current bullish sentiment.

CEEMEA

• Hungary: MNB is expected to keep policy rates unchanged, with EURHUF likely to remain range-bound between 310 and 315.
• Czech Republic: CNB is expected to keep rates on hold, with EURCZK likely to stay above 25.50.
• South Africa: The ANC conference will take place from 16 to 20 December, with potential for limited USDZAR swings within 13.50-14.50 range.
• Poland & Russia: PPI and unemployment data will be released, with Russia's November data expected on 19 December.

Latin America (Latam)

• Brazil: Inflation data will be released on 21 December. The DI curve is expected to flatten further, and the BCB may not cut rates as much as the curve currently prices in.
• Mexico: Inflation data will be released on 21 December, with potential for rate hikes in early 2018.
• Chile: The presidential election will take place on 17 December.
• Colombian Peso: The peso is currently the furthest from its fair value estimate, suggesting potential for appreciation.
• Argentina: Letes have been issued, with the 'carry party' continuing.

Key Trade Recommendations

• Receive 5y CNY NDIRS: New recommendation with PV01 of 10K and entry level at 4.12%.
• Close USDCNY short position: Profit of 5.3%.
• Close USDZAR short position: At 13.50.
• Take profit on 5y CLPxCAM payer position: Profit of 28bp.
• Roll over USDCOP short NDF: Increased exposure in Colombian peso.
• Buy USDTRY: New position with PV01 of 10K USD.
• Buy USDSGD: New position with PV01 of 10K USD.
• Short USDCOP via 3m NDF: New position with PV01 of 12K USD.

Trade Review Summary

Key Financial Metrics and Performance

• Total P/L: -3670 kUSD
• Rates P/L: -5970 kUSD
• FX P/L: +2244 kUSD
• Options P/L: +148 kUSD
• Credit P/L: -93 kUSD

Summary of Key Points

• 2017 Performance: EM markets and financial assets outperformed developed markets.
• 2018 Outlook: The 'Goldilocks' scenario is expected to continue for the first four months, but the year may become more challenging due to reduced QE and higher valuations.
• Currency Volatility: May is a historically volatile month for EM, with potential for trade-related shocks.
• Inflation and Rate Hikes: Inflation expectations may rise in 2018, prompting rate hikes from EM central banks.
• RMB and USD: The RMB is expected to remain strong, but volatility could challenge current positions. The USD may experience a short-term rally before entering a downturn.
• Carry Trade: The carry trade is expected to continue, particularly in the case of Argentina and Brazil.
• Regional Highlights: Brazil, India, Indonesia, South Africa, and Turkey have all performed well despite challenges.