EM Daily:Hoping for the better

In light of the past 3+ years of dismal performance and relentless outflows, the general sense we got from seeing investors over the past few weeks was of great relief. But in some cases that seemed to be extrapolated into some wishful-thinking on the absence of clear risk catalysts. Our view has been constructive on policy response and the benefits of extended liquidity since February, but less so as valuation turned less appealing and USD/UST yields approached historical lows. In our view, this rally hinges on favorable valuation after the sell-off in the turn of the year and - particularly - on the latest bout of USD weakness. We have also been encouraged by some idiosyncratic stories - mainly in LatAm. However, as we discuss in our latest EM Monthly, EM growth will likely turn slowly on the still significant de-leveraging/adjusting that has to go through so that alpha remains largely idiosyncratic rather than systemic. Despite these hopes of a protracted rally, it seems that positioning is not heavy, although we have met some more conservative investors who had been increasing cash lately. Investors appeared to be more cautious on FX - possibly acknowledging the highest dependency on USD weakness. In fact, a trade-weighted basket of EM currencies is trading roughly flat vs. its level of the beginning of the year within a range of only about 2.5% since the beginning of March. Currency stability - besides improving carry/vol - can also benefit SOEs, as in the case of Petrobras. The BRL recovery has been a major input to our upgrading the corporate bonds to a “Buy”. It has boosted cash-flows, leverage, and (domestic) asset sales prospect.