Emerging Markets Outlook and Strategy: Mindful of risks, confident of resilience

Research evidence excerpt

Emerging Markets Outlook and Strategy: Mindful of risks, confident of resilience

Executive Summary

Key topics

The two key risks, energy prices and the Fed, are keeping uncertainty high and positioning low.

We keep OW EM FX supported by the cyclical outlook; MW EM rates, recognizing increasing two-sided risks for inflation and central banks;

and MW EM credit, both sovereigns and corporates, as tight valuations lean against an otherwise constructive tone.

Macro developments

The global cyclical outlook remains resilient, underpinned by a consumer smoothing through the energy shock.

China’s economy lost momentum in 2Q but is expected to lift in 2H, underpinned by fiscal support.

Energy inflation fades, but global core inflation remains sticky.

Top trading themes

EM local markets - FX: Stay OW Latam and EMEA EM vs. UW Asia with longs in higher carry currencies and/or currencies with hawkish

central banks and shorts in low yielding energy importers. OWs include *NEW* COP, MXN, CLP, ZAR, HUF and CZK. UWs include RSD

(EURUSD hedge) and THB.

EM local markets - Rates: We stay MW overall given cross-currents from oil price volatility, hawkish Fed risks and downside headline

inflation surprises meeting sticky core inflation and strong growth signals. We lean further into HY-LY rates compression though, by adding

OW South Africa to OWs in Hungary, Colombia and Mexico, funded with UWs in Thailand, Peru and Chile.

EM Sovereigns: Remain MW; spreads have moved off tights but should stay rangebound, tending to tighten as growth stays strong. Move

UW Armenia. Stay OW Colombia, Argentina, Ecuador, Egypt, Saudi Arabia, and South Africa, Stay UW Brazil, Nigeria, Oman, Poland,

Uruguay and lastly Indonesia (though reduced given rating stability).