EM Macro and Strategy Focus
Economics Focus: We expect MAS to maintain its neutral policy stance as Singapore's GDP growth slows slightly in Q3 and exports to improve in other parts of EM Asia. In EMEA, focus on September inflation numbers across CE3, Israel and Egypt. In LatAm, we foresee inflation in Argentina decelerating but not enough to allow the BCRA to begin easing. We also expect Peru’s BCRP to hold rates at 3.50% on reduced growth concerns and already accommodative monetary policy stance.
Strategy Focus: We concentrate our recommendations in highest conviction trades and keep a neutral stance otherwise. The performance over the past week sent both supportive and cautious signals: While markets with better fundamentals partially retraced the more vulnerable remained under pressure despite some USD relief.
FX: Stay in defensive longs while waiting for more clarity on USD direction. We favor the BRL (vs. CLP) in LatAm and both RUB (vs. USD and also CAD for some oil protection) and PLN vs. EUR in EMEA. They score well on BoP, level of real rates, FX reserves and business cycle. EUR/PLN also posts a low beta vs. US rates and light positioning. Wait for better levels to sell USD/MXN - the V-shaped trajectory we expected for the pair has materialized but recent political headlines and more difficult NAFTA negotiations bode for caution. Stay long PEN on underperformance vs. copper and likely reduced intervention.
Rates: Domestic fundamentals continued to play an important role across local fixed income - from the possibility of rates falling below 7.0% in Brazil, the favorable inflation print in Russia, to a dovish NBP meeting in Poland. Also, except for South Africa, local auctions across EM point to resilient demand. Our top picks remain Russian OFZs - in the belly and the long-end (Mar-33), receivers in PLN (2Y2Y IRS), ILS (3Y1Y), and the short-end of both Brazil (Jul18|Jan19 and Jan19|Jan20) and Colombia (2Y1Y in IBR and Coltes 20s).
Credit: Demand for EM external bonds remains strong despite rising US rates. We remain constructively positioned in high yielders with a growth momentum, including Argentina, Brazil, Ecuador, and Ukraine. We take profit in Egypt 47s vs. 40s and YPF25s vs. 24s, while maintain Pemex 27s vs. Mexico 27s and PETBRA 22s vs. 8.375% 21s. We stay long 5Y basis in South Africa and Turkey.