FX Emerging Markets
Fifth Brics Summit, 26-27 March, Durban, South Africa
for the growth which has made their fiscal performance positive. The lesson that’s possible to take from the European crisis is that fiscal positions that look healthy can quickly deteriorate once credit flows dry up and growth falters.
So there is space for both views: the story could be structurally bearish or it is already providing a juicy buying opportunity. Just for the sake of exemplifying we report two different
‘sell-side’ arguments
supporting different investment recommendations.
“The current exit from EM is more technical than fundamental in nature, though soft EM activity data have certainly contributed and could still accentuate the extent of this sell-off. With the US recovery now on a firmer footing, the risks to EM growth should be contained. With lower leverage levels, EM remains systemically less vulnerable to tighter
14 FX TRADER MAGAZINE July - September 2013
funding than most DM economies. We would not therefore expect this round of deleveraging to resemble the flight- to-quality and contagion-driven sell-offs of 1998, 2002, and 2008. Instead, as is normally the case in technical selloffs, we expect improving valuation to counterbalance outflows in the next few months.” (Deutsche Bank, EM Adjusts to Tightening Liquidity, June 13th)
“Our view remains that this correction will extend over the next few months, as it is essentially driven by US monetary policy repricing, a process that has only just started. There is significant
nervousness there in global
emerging markets and volatility has edged up substantially. This means that
is going to be plenty of
opportunities to trade the market on a tactical basis. However, the strategic call remains to be bearish. We will change our views only if the Fed turns out to be in absolutely no rush whatsoever to reduce quantitative
easing, and if by the same token, the US economy shows some strong signs of back-to-recession mode. In this event, this would resuscitate the generalized hunt for yields. The dollar would weaken, the UST would rally and there would be renewed appetite for high-yielding assets in EM. At this point, our bias is to fade any temporary signs of strength to re-establish bearish positions.” (Société Générale, How to trade the GEM correction, June 13th)
It is obviously a difficult choice, but for the time being we tend to subscribe to the more bearish view, mostly because, as brilliantly put from Jens Nordvig of Nomura, “It is all flow driven, and it is not a move to fade. The catalyst is real (re-rating of global real rates), and the previous EM inflows were big. This could run further. We may be in overshooting territory now versus fundamentals. But it does not matter much in the short-term.” And we think, since past inflows have been so big and
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48 |
Page 49 |
Page 50 |
Page 51 |
Page 52 |
Page 53 |
Page 54 |
Page 55 |
Page 56 |
Page 57 |
Page 58 |
Page 59 |
Page 60 |
Page 61 |
Page 62 |
Page 63 |
Page 64 |
Page 65 |
Page 66 |
Page 67 |
Page 68 |
Page 69 |
Page 70 |
Page 71 |
Page 72 |
Page 73 |
Page 74 |
Page 75 |
Page 76 |
Page 77 |
Page 78 |
Page 79 |
Page 80 |
Page 81 |
Page 82 |
Page 83 |
Page 84 |
Page 85 |
Page 86 |
Page 87 |
Page 88 |
Page 89