Emerging Markets
This <i>Special Report</i> reviews all of our active recommendations, including our over/underweight country and asset allocation positions, as well as our current tactical trades.
Bearish sentiment, higher oil prices and Chinese policy stimulus leave room for a continued bounce in stock prices. But this rally is unlikely to prove sustainable.
The wide WTI - Brent differentials at the front of these respective curves will continue to incentivize crude-oil exports from the U.S. to European refiners, who tend to favor the light-sweet crude coming out of LTO plays.
This week we are publishing a speech given by Chinese finance minister Lou Jiwei, which is highly relevant and informative in understanding the economic logic of Chinese leadership.
In recent travel, our clients remain focused on downside risks to today's range-bound markets. And for good reason. Uncertainty regarding Chinese reaction function is the biggest source of political risk in today's markets. We discuss it in detail in this month's report, along with an update on our views of Brazil, Russia, and Turkey. In addition, we examine the potential casualties of the European immigration crisis and the likelihood of Donald Trump becoming the president of the United States.
Expectations of a deepening EM/China growth slump and RMB depreciation have been the key to the selloff in global risk assets. There is no basis for these expectations to improve. Therefore, there are few fundamental reasons for EM and global risk assets to rally much further. Stay put. In Brazil, the impeachment rally is unsustainable and will reverse sooner than later. Stay short Brazilian risk assets.
A stunning 9.9 million-barrel build in U.S. oil inventories this week failed to arrest the upward climb in prices.
Beyond the ongoing short-term rebound, EM currencies have more downside, and will depreciate by more than is implied by their forward rates on a 6-9 month horizon. This makes us reluctant to recommend buying local currency bonds to absolute-return investors. A new trade: Long Russian/short Malaysian equities. We also reiterate our short MYR/long RUB trade.
The recent rebound is not a harbinger of a prolonged recovery in risk assets. The many potential negatives will keep volatility high and trigger further occasional selloffs.