EM: Keep risk low – Deutsche Bank

Research Team at Deutsche Bank, sees some early signs of overshooting across high-yielders, but with economic forecasts still pessimistic the bar is low for a June/July hike to continue to be priced and additional USD strength.

Key Quotes

“Keep risk low. The 4%+ EMFX depreciation vs. the USD from the recent peak compares with the 3%- rise in DXY reaffirming EM’s high-beta status and reinforcing our cautious warnings of late. We favor low beta PLN vs. EUR and HUF, tactically buy RUB vs. basket (EUR + USD). MXN is most (financially) undervalued – but also among the highest-beta currencies. Local rates have been resilient amid the sell-off.

Idiosyncratic issues in Turkey and South Africa compounded the FOMC’s hawkish turn, but we expect the ZAR curve to benefit from SARB’s more dovish tone and recommend holding linkers in Turkey (adding 10Y nominal bonds above 10.2%). Stay overweight Hungary on valuation and lighter positioning, and hold flatteners in Israel. Take profits in TIIE 5Y5Y vs. 1Y1Y flattener and COLTES 20s vs. IBR3s swap spread compression trades. But hold steepeners in COLTES (30s vs. 24s/20s) and long DI (Jan19s), CLP/CAM (5Y) and Soberanos (Sob 26s vs. NDF 3M).

On credit, renewed fears of higher US yield and the USD, and lingering concerns over China's growth underpin our more cautious stance, but the search for yield is likely strong enough to withstand the challenge and we continue to focus on differentiation and relative value. Favor 20s and old 21s in Petrobras vs. long-end, stay constructive Argentina (particularly warrants, provincial debt, and USD Pars).”