20180205-法国巴黎银行-Finding_the_drivers_of_EM_local_interest_rates_14页_353kb

Latin America Strategy Summary

Core Content

This report provides an analysis of the factors driving Emerging Market (EM) local interest rates using Principal Component Analysis (PCA). It outlines both daily and weekly models, highlighting the importance of external factors such as US interest rates, global financial conditions, and global risk premiums over domestic variables.

Main Points

• PCA Framework: The PCA is used to identify the main market factors influencing EM local rates. It helps in understanding how different EM rates co-vary with external factors.
• Time Frames: The analysis is divided into short-term (35 days) and medium-term (35 weeks) models to capture both immediate and longer-term trends.
• Key Drivers: The main drivers identified are US rates, global financial conditions, and global risk premium. These factors have been shown to significantly influence EM local rates.
• Country-Specific Insights:
  • Brazil, Mexico, Colombia, South Africa, Turkey, Singapore, South Korea, Thailand, and Malaysia are included in the basket of EM countries.
  • Brazil, Turkey, Singapore, South Korea, and Malaysia are more influenced by US rates.
  • Colombia and South Africa are more influenced by the second and third market factors, which relate to global financial conditions and global risk premium.
• Explanatory Power: The first three principal components explain on average 88% of the variability in EM rates in the daily model and 83% in the weekly model.
• BIS Alignment: The findings align with BIS studies, indicating that central banks in EM have limited influence on long-term interest rates, which are primarily driven by external factors.
• Fed Tightening: The report suggests that Fed tightening is not necessarily negative for EM, provided the US rate curve does not steepen. Historically, hiking cycles have coincided with a flattening of the US rate curve, which is favorable for EM.
• Strategic Implications: The strategy recommendations are based on the identified market factors and include a focus on short tenors in Brazil and relative value opportunities in Mexico.

Key Information

• Principal Components:
  • First Market Factor: Primarily influenced by US rates (e.g., US 5y swap rate, US 1y1y forward, US BAA 10y spread).
  • Second Market Factor: Influenced by global financial conditions and crude oil.
  • Third Market Factor: Related to the industrial metals index, indicating commodity dependence in EM risk assets.
• Model Results:
  • Daily Model: The first market factor explains the majority of the variability for most EM countries, with the second and third factors playing a significant role in some.
  • Weekly Model: The first market factor remains dominant, with the second and third factors being more relevant for Thailand and Brazil, respectively.
• External Factors: US rates, global financial conditions, and global risk premium are the main external factors affecting EM local rates.
• Investment Strategy: The strategy emphasizes the need to monitor and anticipate future trends in US rates and global financial conditions, as they are critical for EM investment decisions.
• Recommendations: The report recommends short tenors in Brazil and relative value strategies in Mexico, based on current market dynamics and the identified factors.

Summary Table

Strategy Implications

• Monitoring US Rates: The US 5y and 10y rates are crucial for assessing EM rate trends.
• Global Financial Conditions: These are a key driver of EM rates, particularly in the second and third market components.
• Global Risk Premium: Plays a more significant role in certain EM countries, such as Mexico, Colombia, and South Africa.
• Portfolio Adjustments: The report suggests that the portfolio of recommendations in Latin America should focus on short tenors in Brazil and relative value opportunities in Mexico.
• Periodic Updates: The authors plan to update the analysis periodically and adjust recommendations accordingly.

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