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EM Local Rates Monitor Summary

Core Content Overview

The EM Local Rates Monitor document provides an in-depth analysis of economic forecasts, fixed income trade recommendations, and market dynamics across Emerging Markets (EM). It includes key metrics such as GDP growth, inflation, current account balances, and fiscal balances, as well as trade recommendations and technical models for bond performance in EM local markets.

Main Sections and Key Information

1. Key Economic Forecasts

The table presents forecasts for several regions and countries across three time periods: 2017F, 2018F, and 2019F. The main indicators include:

• Real GDP Growth: Expected to remain stable or decline slightly in most regions, with the Global forecast at 3.8% for all three years.
• Consumer Prices (Inflation): Generally on an upward trend in EM countries, with notable exceptions like Singapore and Hong Kong.
• Current Account (as % of GDP): Mixed outlook, with some EM countries showing a decline while others remain stable or show improvement.
• Fiscal Balance (as % of GDP): Mostly negative, indicating budget deficits, with some countries showing slight improvements.

Notable countries include:

• Czech Republic: Real GDP growth forecasted to decrease from 4.4% to 3.0%.
• Egypt: High inflation expected, with a significant decline in fiscal balance.
• Russia: Moderate GDP growth, but negative fiscal balance.
• Turkey: Strong GDP growth, but high inflation.
• China: High GDP growth, with increasing inflation and decreasing fiscal balance.
• India: Increasing GDP growth, with rising inflation and declining fiscal balance.

2. EM Fixed Income Trade Recommendations

This section provides specific trade recommendations for various EM countries, including:

• Czech Republic:
  • 1Y fwd 1Y5Y IRS steeper (Initiation)
  • 2Y2Y - 5Y5Y IRS steeper (Initiation)
• Hungary:
  • 2Y IRS payer (Initiation)
• Israel:
  • Be long 3Y fwd 1y rate (New Target/Stop)
  • 5Y5Y IRS receiver vs USD (New Target/Stop)
  • 5Y5Y IRS receiver vs HUF (Initiation)
• Poland:
  • 1Y fwd 5s10s IRS steeper (Initiation)
  • Long July-27 (New Target)
• Russia:
  • Receive 1Y IRS (vs Mosprime) (New Target/Stop)
  • 5Y5Y XCCY payer (New Stop)
  • Long Aug-33 (New Target/Stop)
  • Long Mar-22 (New Target/Stop)
• Romania:
  • Long Mar-22 (Initiation)
• South Africa:
  • Long R2030 (Initiation)
• Turkey:
  • 3m fwd 1Y-5YY XCCY steeper (New Target/Stop)

The rationale for each trade recommendation is based on factors such as:

• Carry/roll opportunities
• Inflation expectations
• Term-premium levels
• Liquidity conditions
• External monetary policy influences

3. Market Overview

The market overview provides insights into bond and swap levels, changes in basis points, and overall trends across different EM regions and countries. Key highlights:

• EMEA:

  • Czech Republic: Bond yields are lower than swap rates, with a negative basis.
  • Hungary: Bond yields are lower than swap rates, with a negative basis.
  • Israel: Bond yields are slightly lower than swap rates, with a small negative basis.
  • Poland: Bond yields are higher than swap rates, with a positive basis.
  • Romania: Bond yields are higher than swap rates, with a positive basis.
  • Russia: Bond yields are higher than swap rates, with a positive basis.
  • South Africa: Bond yields are higher than swap rates, with a positive basis.
  • Turkey: Bond yields are higher than swap rates, with a positive basis.

• LatAm:

  • Brazil: Bond yields are higher than swap rates, with a positive basis.
  • Chile: Bond yields are higher than swap rates, with a positive basis.
  • Colombia: Bond yields are higher than swap rates, with a positive basis.
  • Mexico: Bond yields are lower than swap rates, with a negative basis.
  • Peru: Bond yields are higher than swap rates, with a positive basis.

• Asia:

  • China: Bond yields are slightly higher than swap rates, with a small negative basis.
  • Hong Kong: Bond yields are significantly lower than swap rates, with a large negative basis.
  • India: Bond yields are higher than swap rates, with a positive basis.
  • Indonesia: Bond yields are higher than swap rates, with a positive basis.
  • Malaysia: Bond yields are lower than swap rates, with a negative basis.
  • Philippines: Bond yields are higher than swap rates, with a positive basis.
  • Singapore: Bond yields are lower than swap rates, with a negative basis.
  • South Korea: Bond yields are lower than swap rates, with a negative basis.
  • Taiwan: Bond yields are lower than swap rates, with a negative basis.
  • Thailand: Bond yields are lower than swap rates, with a negative basis.

Key Views and Insights

• Carry and Roll Opportunities: Several countries, such as Czech Republic and South Africa, offer attractive carry/roll opportunities.
• Inflation Trends: Inflation is expected to rise in most EM countries, with notable exceptions like Singapore and Hong Kong.
• Term-Premium and Valuation: The term-premium is historically low in many EM countries, which can present attractive investment opportunities.
• Monetary Policy Impact: The document emphasizes the role of monetary policy in shaping yield curves, especially in the context of expected rate hikes and easing cycles.
• External Sensitivity: External sensitivity (betas) is measured against 10Y US treasuries, indicating how EM local bonds react to global market movements.

Technical Models and Bond Performance

The technical models highlight:

• Best Bonds: Certain EM local bonds are identified as having the best performance based on valuation and yield trends.
• Best Bond Switches: The document suggests optimal switches for bond positions, based on yield curve movements and term-premium dynamics.

Recent Publications

The document references recent publications that provide insights into:

• EM Local Rates Monitor - What is hot and what is not (30/01/2018)
• EM Fixed Income - Assessing term-premium across local markets (26/01/2018)
• EMEA Special Report - Turkey: Stronger push (same pull) factors = a short window of opportunity (29/01/2018)
• EMEA: EMEA Fixed Income - Stand your ground (19/01/2018)
• LatAm: Latam Local Markets Analytics Package (06/02/2018)
• Asia: Asia Local Markets Weekly - Test of resilience (02/02/2018)

Conclusion

The EM Local Rates Monitor offers a comprehensive view of economic and market conditions across various EM regions. It highlights attractive investment opportunities in fixed income markets, particularly in countries with low term-premium and favorable inflation dynamics. The trade recommendations and technical models provide actionable insights for investors, while the economic forecasts offer a macroeconomic context for decision-making.