December 2016 See end pages for analyst certification and important disclosures, including investment banking relationships. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as a single factor in making their investment decision. Luis Oganes AC (212) 834-4326 [email protected]J.P. Morgan Securities LLC Emerging Markets Research EM Outlook for 2017: EM macro and market prospects clouded by US policy uncertainty
55
Embed
Emerging Markets Research - JPMorgan Chasemedialibrary... · the objectivity of this report. Investors should consider this report as a single factor in making their investment decision.
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
December 2016
See end pages for analyst certification and important disclosures, including investment banking relationships. J.P. Morgan does and seeks to do
business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect
the objectivity of this report. Investors should consider this report as a single factor in making their investment decision.
EM Outlook for 2017: EM macro and market prospects clouded by US policy uncertainty
E M
O S
:
E M
M
A C
R O
A
N D
M
A R
K E
T P
R O
S P
E C
T S
C
L O
U D
E D
B
Y
U S
P
O L
I C
Y
U N
C E
R T
A I N
T Y
10 key investment themes for EM fixed income in 2017
EM braces for a period of heightened uncertainty into 2017. 2016 was shaping up to be one of the strongest years on record
for EM fixed income returns, with markets reflecting an inflection point in EM macro fundamentals after several years of deterioration, as well as the intensification of a global search for yield amid the expansionary G-3 monetary policy regimes. But the unexpected US election outcome appears to be dramatically altering these supportive dynamics for EM fixed income. Three aspects of US policy create specific challenges for EM fixed income: 1) Pro-growth US policies, which would lead to higher US rates; 2) Potential rewriting of US rules of engagement in global trade and disruptions to EM trade with the US; and 3) Realignment of global geopolitics.
Uncertainty about the implications of the Trump presidency prompts a reassessment of the EM macro outlook. In trying to explain the relative outperformance of EM versus DM assets in 2016, we had argued that a significant driver was the widening of the EM-DM growth differential this year after narrowing almost relentlessly since 2010. Before the surprise US election results, we had also expected that the recovery and repair in EM economies would continue into 2017-18, stabilizing the growth differential with DM and thereby sustaining—albeit at a slower pace—capital inflows into EM and asset outperformance. The US election result has changed this view. We take the economic policies spelled out in the promises for the first 100 days of the new administration as the working template to formulate our near-term economic and policy projections.
We expect overall EM growth to improve 0.4%pts to 4.2% in 2017. This is less than the 4.4% we had been projecting before the US elections, but the ongoing recovery and repair in EM economies is likely to go forward. China remains the fulcrum of EM growth and our forecast of a 0.3%-pt slowdown in China’s GDP to 6.4% in 2017 implies that other countries would have to see sizeable improvements for our EM growth forecast to materialize. At the regional level, the majority of this uplift is expected to come from Latin America, while EMEA EM is forecast to accelerate, albeit moderately. Reflation is still far away in EM, as negative output gaps across EM keep global reflation limited to DM.
On monetary policy, the majority of EM central banks remain biased towards easing or remaining on hold. Aside from Brazil, Colombia and Russia, where we expect large easing, there are a handful of countries where rates are expected to be cut modestly. However, monetary easing has become increasingly ineffective because rising credit and NPLs has stifled monetary transmission in many EM countries. Also in most countries, real rates are forecast to rise despite rate cuts. Mexico is the one notable exception, where we see continuing rate hikes. In all countries, the space for easing remains circumscribed by global financial conditions. With the exception of Brazil and India, where strong disinflation and weak growth are likely to provide the space to cut while global rates are adjusting upwards, in most other countries we expect the easing cycle to be paused until US yields and USD peak. Support from fiscal policy, however, is less generous as the fiscal positions are projected to consolidate in most EM countries.
1
E M
O S
:
E M
M
A C
R O
A
N D
M
A R
K E
T P
R O
S P
E C
T S
C
L O
U D
E D
B
Y
U S
P
O L
I C
Y
U N
C E
R T
A I N
T Y
10 key investment themes for EM fixed income in 2017 (cont.)
Outflow pressures to persist; modest inflows of $20bn expected in 2017. Inflows largely surpassed expectations in 2016, standing at +$49.4bn YTD, but outflow pressures have intensified post-US elections. We now forecast lower inflows of $20bn in 2017, with outflows likely to continue in the near term, particularly from ETFs. This year’s flows have been tracking higher than our models suggest, meaning there is risk of a possible correction, particularly if risk aversion persists. The recent decline in EM returns is a risk to strategic flows in 2017, but the structural under-allocation to EM can continue to attract inflows, in our view. Official data tracking foreign purchases of local currency bonds has shown a decline over the past two years, with 2016 foreign purchases YTD at the slowest pace since the financial crisis at +$22.8bn.
In EM local markets, we are UW FX in all regions, and UW rates via UW Asia and MW Latam and EMEA EM rates, with curve steepeners in outright trades. In EM Asia, we are UW FX via PHP and IDR. We are also short NEA currencies in terms of outright trades, with short CNH and KRW the strongest conviction views. In EMEA EM FX, our highest conviction is UW in TRY, and we are UW in ZAR, PLN and HUF. We keep UW Latam FX via COP and CLP. In Latam rates, we are UW Mexico, while OW Brazil and Colombia as idiosyncrasies are supportive. We close our Peru OW rates position. In EMEA EM rates, we hold a MW local bond position with an UW in Hungary against an OW in South Africa in our GBI-EM model portfolio, and hold 2s5s IRS steepeners in Poland as a lower beta expression of a bearish CEE duration view. In EM Asia rates, we express our duration UW via UW positions in Philippines and Thailand local bonds, while in outright trades we recommend steepeners in low yielders like THB, TWD and CNY, and favor Korea (long 3y KTB) over Singapore rates (short 10y SGS) at current valuations.
Stay tactically UW EM sovereign and corporate credit. We stay UW the EMBIGD. In Latam we have added UW Colombia to existing UWs in Mexico and Pemex, but added OW Dominican Republic where valuations now look attractive. We moved Chile back to MW from UW and took profits on our OW in Peru. Elsewhere in the region, we remain OW Argentina, Ecuador and Panama, and UW Bolivia. In other regions, we have added EM sovereign risk in CEE via OW Croatia and Serbia, while staying with core UWs in South Africa and Turkey. We took profits on our UW Philippines, and move Indonesia from OW to MW. We remain UW Vietnam and Mongolia, and OW Kazakhstan. In EM corporates, we remain defensively positioned in Asia, favoring IG over HY, while in CEEMEA we are UW Middle East, have a small OW in EM Europe (OW Turkey), and select HY OWs elsewhere in the region. In Latam corporates we are now more selective after a strong 2016.
2
E M
O S
:
E M
M
A C
R O
A
N D
M
A R
K E
T P
R O
S P
E C
T S
C
L O
U D
E D
B
Y
U S
P
O L
I C
Y
U N
C E
R T
A I N
T Y
10 key investment themes for EM fixed income in 2017 (cont.)
We start 2017 with a cautious stance on EM fixed income that will likely need to be reassessed early next year once more information about the policy intentions of the new US administration becomes available. We had been reducing more bullish EM positions since the end of September given the strong YTD EM fixed income performance and Q4 event risks around US politics and G-3 rates. Following the US election we think the path of many financial market drivers for EM needs to be reassessed, and we have moved further UW EM FX, reduced our EM duration stance to small UW, and moved tactically UW EM hard currency sovereign and corporate debt. EM FX seems a clearer trade than EM rates, where the outlook for the US rates curve is more dependent on the extent of growth stimulating measures by the new US administration and the Fed’s reaction to this. EM FX seems likely to weaken versus the USD in a wider range of scenarios.
In EM local markets, we are UW FX in all regions, and UW rates via UW Asia and MW Latam and EMEA EM rates, with curve steepeners in outright trades. In EM Asia, we are UW FX via PHP and IDR. We are also short NEA currencies in terms of outright trades, with short CNH and KRW the strongest conviction views. In EMEA EM FX, our highest conviction is UW in TRY, and we are UW in ZAR, PLN and HUF. We keep UW Latam FX via COP and CLP. In Latam rates, we are UW Mexico, while OW Brazil and Colombia as idiosyncrasies are supportive. We close our Peru OW rates position. In EMEA EM rates, we hold a MW local bond position with an UW in Hungary against an OW in South Africa in our GBI-EM model portfolio, and hold 2s5s IRS steepeners in Poland as a lower beta expression of a bearish CEE duration view. In EM Asia rates, we express our duration UW via UW positions in Philippines and Thailand local bonds, while in outright trades we recommend steepeners in low yielders like THB, TWD and CNY, and favor Korea (long 3y KTB) over Singapore rates (short 10y SGS) at current valuations.
Stay tactically UW EM sovereign and corporate credit. We stay UW the EMBIGD. In Latam we have added UW Colombia to existing UWs in Mexico and Pemex, but added OW Dominican Republic where valuations now look attractive. We moved Chile back to MW from UW and took profits on our OW in Peru. Elsewhere in the region, we remain OW Argentina, Ecuador and Panama, and UW Bolivia. In other regions, we have added EM sovereign risk in CEE via OW Croatia and Serbia, while staying with core UWs in South Africa and Turkey. We took profits on our UW Philippines, and move Indonesia from OW to MW. We remain UW Vietnam and Mongolia, and OW Kazakhstan. In EM corporates, we remain defensively positioned in Asia, favoring IG over HY, while in CEEMEA we are UW Middle East, have a small OW in EM Europe (OW Turkey), and select HY OWs elsewhere in the region. In Latam corporates we are now more selective after a strong 2016.
2
E M
O S
:
E M
M
A C
R O
A
N D
M
A R
K E
T P
R O
S P
E C
T S
C
L O
U D
E D
B
Y
U S
P
O L
I C
Y
U N
C E
R T
A I N
T Y
Key DM and EM macro and market assumptions for 2017
2017 Key DM and EM assumptions
Note: Real GDP and Inflation data as of end-2016
* Data as of Nov 21, COB
Source: J.P. Morgan, Bloomberg
Current/ End 2016 Year- end 2017F
Real GDP Growth (%oya)
Developed Markets 1.6 1.8
US 1.5 2.0
Euro Area 1.6 1.5
Japan 0.8 1.3
Emerging Markets 3.8 4.2
Inflation (%Dec/Dec)
Developed Markets 1.3 1.8
US 1.8 2.3
Euro Area 0.8 1.3
Japan -0.1 0.7
Emerging Markets 3.5 3.6
Misc.*
10Y UST; % 2.32 2.55
EUR/USD 1.06 1.15
Brent, $/bbl 48.90 60.00
WTI, $/bbl 47.49 58.00
3
E M
O S
:
E M
M
A C
R O
A
N D
M
A R
K E
T P
R O
S P
E C
T S
C
L O
U D
E D
B
Y
U S
P
O L
I C
Y
U N
C E
R T
A I N
T Y
We forecast much lower returns in 2017, with local currency outperforming at a 6%
return, while EMBIGD and CEMBI Br returns will be 0.6% and 2.0%, respectively
Key EM returns and technical forecasts for 2017
Source for both charts: J.P. Morgan. Note: As of COB 11/21/2016
2016 YTD returns vs. 2017 forecasted returns; %
Current/YTD 2016F 2017F
EMBIG Div STW; bp 360 375 425
EMBIG Div Total Returns +8.7% 0.6%
CEMBI Broad STW; bp 324 375 400
CEMBI Broad Total Returns +9.6% 2.0%
GBI-EM Yield 6.89% 6.89% 6.85%
GBI-EM FX Return +4.8% -0.7%
GBI-EM US$ Return +7.3% +6.8% +6.0%
EM Equities Return +6.3% +15.0%
EM Real GDP Growth 3.8 3.8 4.2
EM Policy Rates 5.13 5.12 4.81
EM Inflation 3.5 3.5 3.6
EM Sovereign Gross Supply $128.9bn $129.4bn $108.4bn
Net (Gross less
cashflows) $58.9bn $56.9bn $21.5bn
EM Corporate Gross Supply $285bn $300bn $315bn
Net (Gross less
cashflows) $130bn $122bn $102bn
EM Fixed Income Inflows +$49.4bn +$40bn +$20bn
4
8.7% 9.6%
7.3% 7.9%
-0.7%
0.6%
2.0%
6.0% 6.9%
-0.7% -2%
0%
2%
4%
6%
8%
10%
12%
EMSovereigns(EMBIGD)
EMCorporates(CEMBI Br)
EM LocalMarkets (GBI-EM GD USD)
Local BondReturns (GBI-
EM GD)
FX Return(GBI-EM GD)
2016 YTD Return
2017F Return
E M
O S
:
E M
M
A C
R O
A
N D
M
A R
K E
T P
R O
S P
E C
T S
C
L O
U D
E D
B
Y
U S
P
O L
I C
Y
U N
C E
R T
A I N
T Y
EM assets have been the worst hit since the US elections but are still among the best
YTD performers across asset classes globally
Returns across asset classes YTD and since US election results; as of 11/25/2016 COB, %
Source: J.P. Morgan, Bloomberg
5
-6.7%
-3.4%
1.2%
2.7%
3.8%
4.3%
4.5%
5.1%
6.9%
7.7%
7.8%
7.8%
8.3%
8.6%
9.6%
10.4%
12.9%
15.9%
0.8%
7.0%
-2.7%
-3.9%
-0.8%
4.0%
3.2%
-2.6%
-8.0%
-0.5%
-5.2%
-2.6%
3.4%
-4.6%
-2.2%
2.0%
-4.1%
-0.2%
-10% -5% 0% 5% 10% 15% 20%
European Equities
Japanese Equities
UST
EM FX
Euro HG
JPM USD Index
MSCI World (DM) Lcl
US HG
EM Local Markets (USD)
Euro HY
EM Equities
EM Local Markets (Local Currency)
S&P 500
EM Sovereigns (Hard Currency)
EM Corporates (Hard Currency)
JPM Commodities
EM Frontier Markets
US HY
Since US election results
YTD
E M
O S
:
E M
M
A C
R O
A
N D
M
A R
K E
T P
R O
S P
E C
T S
C
L O
U D
E D
B
Y
U S
P
O L
I C
Y
U N
C E
R T
A I N
T Y
Global government bonds have been rallying since 2007, but EM fixed income
performance momentum has now reversed
Global government bond yields (GBI index, %) vs. EM
local market bond yields (GBI-EM GD, % right axis)
Source for both charts: J.P. Morgan. Note: As of COB 9/7/2016
EMBIGD vs. GBI-EM GD total returns index; Jan. 1st
2016 = 100
5
5.5
6
6.5
7
7.5
8
8.5
9
9.5
10
0.5
1
1.5
2
2.5
3
3.5
4
4.5Global Govt Bond yields (GBI index, %)
EM local bond yields (GBI-EM GD, %, right axis)
95
100
105
110
115
120EMBIGD Total Return
GBI-EM Total Return
6
E M
O S
:
E M
M
A C
R O
A
N D
M
A R
K E
T P
R O
S P
E C
T S
C
L O
U D
E D
B
Y
U S
P
O L
I C
Y
U N
C E
R T
A I N
T Y
EM asset performance in 1Q17 will be determined by the US pro-growth policy
announcements (tax cuts and infrastructure spending), as well as trade restrictions
Trump scenarios and asset performance across strong or weak infrastructure plan and trade restrictions
Source: J.P. Morgan
Infrastructure / Fiscal / Growth
Strong Weak
Hawkish Fed Reaction Dovish Fed Reaction T
rad
e R
estr
icti
on
s
Str
on
g
Outperformers: Outperformers: Sov Credit
FX Rates Sov Credit FX Rates Sov Credit
CEE CEE Hungary
RUB Russia Russia
IDR Chile
Brazil
Korea
Underperformers: EM FX Underperformers: EM FX
FX Rates Sov Credit FX Rates Sov Credit
MXN Malaysia Mexico CNH Mexico Mexico
KRW CEE Indonesia KRW Vietnam
CNH Mexico Turkey TWD
TRY Vietnam MXN
ZAR
Wea
k
Outperformers: Sov Credit Outperformers: HY rates
FX Rates Sov Credit FX Rates Sov Credit
CLP India Ukraine BRL Brazil Argentina
PEN Mongolia ZAR South Africa Mexico
INR Chile IDR Indonesia Pemex
Peru ARS Colombia
MXN Mexico
Underperformers: EM FX Underperformers: LY rates
FX Rates Sov Credit FX Rates Sov Credit
MYR Indonesia Philippines CEE CEE Philippines
IDR Turkey Turkey Chile Turkey
7
E M
O S
:
E M
M
A C
R O
A
N D
M
A R
K E
T P
R O
S P
E C
T S
C
L O
U D
E D
B
Y
U S
P
O L
I C
Y
U N
C E
R T
A I N
T Y
EM top trade recommendations as we head into 2017
Source for both tables: J.P. Morgan
EM Local Markets EM Hard Currency Markets
EM Local Markets
GBI-EM Model Portfolio UW FX overall UW Bonds overall
Asia
- GBI-EM Model Portfolio FX Rates
UW IDR, PHP UW Philippines, Thailand
- Trades FX Rates
Long EUR/CNH
Long USD/CNH Spot
Pay USD/CNH 6m/12m DF Curve
Long USD/KRW 3m NDF
Long 3m 6.80-6.90 USD/CNH call
spreads financed by selling 3m 6.72
USD/CNH calls
Long 3m 1140-1180 USD/KRW call
spread
Receive 10y KRW vs. USD spread
Long INR 4y GovSec (8.27% IGB 2020)
Receive 5y5y HKD vs USD Spread
Pay SGD 1y IRS
Long KRW 3y KTB futures
Pay TWD 2s5s NDIRS curve
Pay THB 2s5s NDIRS curve
Short SGD 10y SGS (SIGB 2.125 06/01/26)
Pay CNY 2s5s ND-IRS
EMEA EM
- GBI-EM Model Portfolio FX Rates
OW South Africa
UW ZAR, TRY, HUF, PLN UW Hungary
- Trades FX Rates
Long USD/PLN
Long 3m EUR/PLN 1x1 call spd
Long 2m USD/TRY 1x1 call spd
Long 3m EUR/ILS 1x1.5 put spd
Short 27-Nov-17 EUR/CZK forward
Receive 5y5y ZAR IRS, pay 5y5y US IRS
TRY 1s5s xccy flatteners
PLN 2s5s IRS steepeners
Latin America
- GBI-EM Model Portfolio FX Rates
OW Brazil, Colombia
UW COP, CLP UW Mexico
- Trades FX Rates
Short USD/ARS 6m NDF
Long BRL/CLP
Long 6m ARS/CLP NDF
MX Buy Dec20 breakevens
MX Pay 1y TIIE
MX Switch into Jun26 Mbono from Nov42 Mbono
BZ Receive DI Jan 18
BZ Buy LTN Jul20 paying 4Y NDF
BZ Switch into May21 NTNB from Jan21 NTNF
CL Enter 2s5s steepeners
CO Receive 3Y IBR
CO Switch into Jul24 from Sep30
CO Enter 2s10s IBR steepeners
AR Buy Bocan17 floater (B+300)
AR Buy Feb17 Lete
AR Buy Sep18 nominal bond (new issue)
AR Buy ARS local-law GDP warrant
EM Hard Currency Markets
EMBIGD MP UW overall
OW UW
Argentina Bolivia
Croatia Colombia
Dominican Republic Mexico
Ecuador Mongolia
Kazakhstan Pemex
Panama PLNIJ
Serbia South Africa
Turkey
Vietnam
CEMBI UW overall
Asia Long Short
UOBSP 2.88% T2 ‘22c CCAMCL 4.45% AT1
RV: Buy RILIN 4.125% '25 vs. DALWAN 4.875% ’18
Sell BHARTI 4.375% '25 DALWAN 7.25% ‘24
PRKSON 4.5% ‘18 CIFI 7.75% ‘20
KAISAG A ‘19 LPKRIJ 6.75% ‘26
VEDLN 9.5% ‘18 CIKLIS 4.95% ‘26
VEDLN 6.0% ‘19
EMEA EM Long Short
TIAMK 5.99% '22
AABAR 0.5% ‘20
GLYHO 8.125% ‘21
PDLLN 8.25% ‘20
SBERRU 5.125% ‘22
FBNNL 8.00% '21
Latam Long Short
Belly of Petrobras USD curve ('20,
'21N, '21O, '23, '24 and '26) and EUR
curve (2.75% '18, 4.875% '18,
5.875% ‘22 & 4.25% '23)
CAIXBR 7.250% '24
BANBRA 9.0% & 9.25% Perps
BBVASM 6.008% '22
CEMEX 7.250% '21 & 9.375% '22
8
Agenda
Page
E M
O S
:
E M
M
A C
R O
A
N D
M
A R
K E
T P
R O
S P
E C
T S
C
L O
U D
E D
B
Y
U S
P
O L
I C
Y
U N
C E
R T
A I N
T Y
9
EM Macro Outlook: Parsing the Trump shock to EM 9
EM Technicals: Outflow pressures to persist; modest inflows
of $20bn expected in 2017
19
EM Local Markets Strategy 27
EM Hard Currency Strategy 37
Appendix 42
E M
M
A C
R O
O
U T
L O
O K
:
P A
R S
I N
G
T H
E
T R
U M
P
S H
O C
K
T O
E
M
The first-round impact of higher US growth would be to narrow the EM-DM growth
differential, but EM growth could rise by 0.3%pt for every 1%pt increase in DM growth
Growth differential and capital flows
Source: J.P. Morgan
Impact of 1% higher DM growth on EM; %-pt
-100
-50
0
50
100
150
-2
0
2
4
6
05 08 11 14 17
EM ex CN less DM growth
Capital flows (right)
Left axis: %-pt, right axis: USD bn 2qma
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
EM EM Asia Latam EMEA CEE
2000-11 2012-15
Source: J.P. Morgan. Based on 16-country quarterly panel AR (1) regression of EM
growth on DM growth and 4-qtr lagged EM debt-to-GDP ratio from 2005-15
10
E M
M
A C
R O
O
U T
L O
O K
:
P A
R S
I N
G
T H
E
T R
U M
P
S H
O C
K
T O
E
M
EM trade linkages with the US are highest for Latin America…
EM trade linkages with the US
Note: All data refer to 2015, regional aggregates include smaller countries not shown in this table
Source: IMF, J.P. Morgan
Exports to the US Exports Exports to the US Trade balance
with US Total trade balance GDP
(% of total exports) (% of GDP) (% of total US imports) (% of GDP) (USDbn) Mexico 81.1 33.3 13.1 9.0 -4.7 1,144
Ecuador 39.5 18.6 0.3 1.5 -3.0 99
Colombia 27.5 12.2 0.6 -2.0 -6.3 293
Venezuela 26.6 22.2 0.7 2.8 5.5 240
Peru 15.2 17.3 0.2 -1.8 -4.4 192
Chile 13.2 25.9 0.4 -1.5 -0.1 240
Brazil 12.7 10.8 1.2 -0.1 1.1 1,773
Argentina 6.0 9.7 0.2 -0.7 -0.5 586
Latam 31.0 18.1 17.9 1.1 -2.4 4,978
Israel 27.4 22.3 1.1 3.4 1.4 296
Saudi Arabia 9.6 31.9 1.0 -0.2 5.8 653
Iraq 7.8 30.1 0.2 1.1 3.3 169
Angola 7.7 32.2 0.1 1.2 14.3 103
Kuwait 7.6 46.6 0.2 1.0 20.5 121
South Africa 7.3 28.4 0.3 0.0 -3.0 313
Egypt 5.1 6.4 0.1 -0.9 -14.7 331
Morocco 4.3 20.5 0.0 -1.4 -15.4 103
Nigeria 3.1 11.6 0.1 -0.4 -0.3 490
Qatar 1.5 34.1 0.1 -1.4 17.0 185
UAE 1.0 63.2 0.1 -6.7 -12.0 345
MEA 7.5 28.8 3.4 -0.6 -0.4 3,357
11
E M
M
A C
R O
O
U T
L O
O K
:
P A
R S
I N
G
T H
E
T R
U M
P
S H
O C
K
T O
E
M
…followed by EM Asia, with the lowest trade linkages for EMEA EM
EM trade linkages with the US
Source: IMF, Haver, J.P. Morgan
Exports to the US Exports Exports to the US Trade balance
with US Total trade balance GDP
(% of total exports) (% of GDP) (% of total US imports) (% of GDP) (USDbn) Turkey 4.5 19.6 0.3 -0.6 -8.6 734
Russia 2.8 25.9 0.7 -0.2 12.2 1,325
Hungary 2.8 81.7 0.3 0.8 5.0 121
Czech Rep. 2.4 87.1 0.2 0.9 9.7 182
Poland 2.3 41.7 0.2 0.2 0.9 475
Kazakhstan 2.1 20.4 0.0 0.1 -0.3 173
Romania 1.9 34.2 0.1 0.2 -5.2 177
Ukraine 1.3 42.1 0.0 -1.1 0.7 91
EM Europe 2.9 32.8 2.0 -0.1 3.1 3,362
Vietnam 21.1 85.4 1.7 14.0 -26.7 191
China 18.0 20.8 21.5 2.4 6.2 10,983
India 15.2 12.7 2.0 0.9 -6.6 2,091
Philippines 15.0 20.1 0.5 0.3 -5.0 292
Korea 13.3 38.3 3.2 1.9 6.6 1,377
Pakistan 13.1 9.5 0.2 0.5 -14.4 270
Taiwan 12.1 54.5 1.8 1.0 9.2 524
Thailand 11.2 53.4 1.3 2.5 2.3 395
Indonesia 10.8 17.5 0.9 1.0 0.9 859
Hong Kong 9.5 150.2 0.3 5.5 -18.4 310
Malaysia 9.4 67.5 1.5 1.6 8.1 296
Singapore 6.9 120.1 0.8 -3.2 18.6 293
EM Asia 16.2 27.0 35.7 2.2 3.2 17,974
EM total 16.2 26.4 59.0 1.5 1.8 29,671
EM total (ex. China) 5.8 11.5 37.5 -1.8 -0.3 18,689
12
E M
M
A C
R O
O
U T
L O
O K
:
P A
R S
I N
G
T H
E
T R
U M
P
S H
O C
K
T O
E
M
Latam and CEE would benefit the most from a lift in US private consumption resulting
from fiscal stimulus
Correlations of EM exports and US demand
Source: J.P. Morgan
VAR suggest broad-based lift to EM exports from higher
consumption
EM Asia Asia ex
CN/IN Latam
MENA/
Africa CIS CEE
US GDP
pre-GFC avg 0.6 0.6 0.6 0.5 0.4 0.2 0.1
3Q14-2Q16 avg 0.1 0.1 -0.1 0.4 0.2 -0.1 -0.3
US consumption
pre-GFC avg 0.4 0.5 0.4 0.4 0.3 0.1 0
3Q14-2Q16 avg 0.1 0.1 0 0.4 0.3 -0.3 0
US goods consumption
pre-GFC avg 0.2 0.3 0.2 0.1 0 0.1 0
3Q14-2Q16 avg 0.2 0.3 0 0.3 0 -0.4 0.6
US inv (structures)
pre-GFC avg 0.3 0.2 0.3 0.3 0.5 0 0.2
3Q14-2Q16 avg -0.6 -0.6 -0.5 -0.3 -0.4 -0.2 -0.5
US inv (equipment)
pre-GFC avg 0.5 0.5 0.4 0.5 0.5 0 0
3Q14-2Q16 avg 0.5 0.5 0.7 0.1 0.6 0.3 0.3
EM EM Asia EM Asia
ex CN/IN Latam
MENA/
Africa CIS CEE
US GDP 2 - - 2 1.7 - -
US consumption 5.4 7.4 8.7 2.8 3.6 4.9 7
US goods cons. 2.1 2.8 3.4 1 1.4 1.9 2.5
US inv
(structures) - - - - - - -
US inv
(equipment) - - - 0.4 0.4 - -
5 year rolling correlations of EM exports and US demand variables
Dynamic response of EM exports to US demand variables
Source: J.P. Morgan estimates, CPB, Haver, impact after 4 quarters, "-" indicates
no significant impact
13
E M
M
A C
R O
O
U T
L O
O K
:
P A
R S
I N
G
T H
E
T R
U M
P
S H
O C
K
T O
E
M
We expect overall EM growth to improve 0.4%pts to 4.2% in 2017…
2016-2018 Real GDP (%oya), inflation (%Dec/Dec) and current account balance (% if GDP)
Brazil 14.00 30 Nov 16 (-25bp) 12.75 11.75 11.25 11.25
Mexico 5.25 Dec 16 (+50bp) 5.75 6.00 6.00 6.25
Chile 3.50 Mar 17 (-25bp) 3.25 3.25 3.25 3.25
Colombia 7.75 30 Jan 17 (-25bp) 6.75 6.00 6.00 6.00
Source: J.P. Morgan. *Effective rate is a weighted average of the ON lending rate and the 1-week repo rate and changes on a daily basis
17
E M
M
A C
R O
O
U T
L O
O K
:
P A
R S
I N
G
T H
E
T R
U M
P
S H
O C
K
T O
E
M
Barring China and Turkey, in the other large EMs (Brazil, India, Mexico, Russia
and South Africa) fiscal policy is likely to remain in consolidation mode
EM real policy rates (% p.a. for real policy rate) and fiscal balances (% of GDP)
1. Real policy rates are deflated using one-year ahead IMF CPI forecasts (as a proxy for inflation expectations). 2. J.P. Morgan forecast of headline fiscal balance,
which includes interest payments.
Source: J.P. Morgan. Outlook is easing (expansion) if 2017 real rates (fiscal balances) are below current levels, vice versa. Overall deficit for China (augmented)
and India (consolidated).
Real policy rate1 Fiscal balance2
Current End-2016 End-2017 Outlook End-2016 End-2017 Outlook
EM local market issuance will increase by +9% in USD terms in 2017
Thailand estimations for fiscal year ending in September, India estimations are for fiscal year ending March, Mexico 2016 data ending in mid November. The yoy total increase is estimated
using 2017 and 2016 bond figures with current FX spot. This is: The sum of 2017 supply divided by the sum of 2016 supply with current FX. Source: Finance Ministries, Central Banks
and J.P. Morgan.
EM net bond supply for 2014-2017 in USD bn and local currency terms
$ equiv.
CCY Supply per year Supply per year; USDbn %-yoy increase
Country Type Units '14 '15 '16 '17 '14 '15 '16 '17 '17/'16 ($bn)
United Arab Emirates 5,500 1,000 (4,500) 309 600 909
Abu Dhabi 5,000 - -5,000 101 - 101
Dubai - 1,000 1,000 208 600 808
Sharjah 500 - -500 - - -
Zambia - - - 237 - 237
EMEA EM 69,645 60,200 -9,445 21,466 24,130 45,596
49
A P
P E
N D
I X
Disclosures
Disclosures
Analyst Certification: The research analyst(s) denoted by an “AC” on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this
report, the research analyst denoted by an “AC” on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in
this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of
any of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this
report. For all Korea-based research analysts listed on the front cover, they also certify, as per KOFIA requirements, that their analysis was made in good faith and that the views
reflect their own opinion, without undue influence or intervention.
Other Disclosure: A contributor to this report has a household member who is a senior portfolio manager of and investor in certain emerging markets mutual funds, which may
invest in instruments discussed in this report.
Important Disclosures
Company-Specific Disclosures: Important disclosures, including price charts and credit opinion history tables, are available for compendium reports and all J.P. Morgan–covered
companies by visiting https://jpmm.com/research/disclosures, calling 1-800-477-0406, or e-mailing [email protected] with your request. J.P. Morgan’s
Strategy, Technical, and Quantitative Research teams may screen companies not covered by J.P. Morgan. For important disclosures for these companies, please call 1-800-477-
Explanation of Emerging Markets Sovereign Research Ratings System and Valuation & Methodology: Ratings System: J.P. Morgan uses the following issuer portfolio weightings for Emerging Markets sovereign credit strategy: Overweight (over the next three months, the
recommended risk position is expected to outperform the relevant index, sector, or benchmark credit returns); Marketweight (over the next three months, the recommended risk
position is expected to perform in line with the relevant index, sector, or benchmark credit returns); and Underweight (over the next three months, the recommended risk position is
expected to underperform the relevant index, sector, or benchmark credit returns). NR is Not Rated. In this case, J.P. Morgan has removed the rating for this security because of
either legal, regulatory or policy reasons or because of lack of a sufficient fundamental basis. The previous rating no longer should be relied upon. An NR designation is not a
recommendation or a rating. NC is Not Covered. An NC designation is not a rating or a recommendation. Recommendations will be at the issuer level, and an issuer
recommendation applies to all of the index-eligible bonds at the same level for the issuer. When we change the issuer-level rating, we are changing the rating for all of the issues
covered, unless otherwise specified. Ratings for quasi-sovereign issuers in the EMBIG may differ from the ratings provided in EM corporate coverage.
Valuation & Methodology: For J.P. Morgan's Emerging Markets Sovereign Credit Strategy, we assign a rating to each sovereign issuer (Overweight, Marketweight or
Underweight) based on our view of whether the combination of the issuer’s fundamentals, market technicals, and the relative value of its securities will cause it to outperform,
perform in line with, or underperform the credit returns of the EMBIGD index over the next three months. Our view of an issuer’s fundamentals includes our opinion of whether
the issuer is becoming more or less able to service its debt obligations when they become due and payable, as well as whether its willingness to service debt obligations is
J.P. Morgan Sovereign Research Ratings Distribution, as of Jul 01, 2016
Note: The Sovereign Research Rating Distribution is at the issuer level. Please note that issuers with an NR or an NC designation are not included in the table above. *Percentage of investment banking clients in each rating category.
Analysts' Compensation: The research analysts responsible for the preparation of this report receive compensation based upon various factors, including the quality and accuracy
of research, client feedback, competitive factors, and overall firm revenues.
Other Disclosures J.P. Morgan ("JPM") is the global brand name for J.P. Morgan Securities LLC ("JPMS") and its affiliates worldwide. J.P. Morgan Cazenove is a marketing name for the U.K. investment banking
businesses and EMEA cash equities and equity research businesses of JPMorgan Chase & Co. and its subsidiaries.
Options related research: If the information contained herein regards options related research, such information is available only to persons who have received the proper option risk disclosure
documents. For a copy of the Option Clearing Corporation's Characteristics and Risks of Standardized Options, please contact your J.P. Morgan Representative or visit the OCC's website at
Legal Entities Disclosures U.S.: JPMS is a member of NYSE, FINRA, SIPC and the NFA. JPMorgan Chase Bank, N.A. is a member of FDIC. U.K.: JPMorgan Chase N.A., London Branch, is authorised by the Prudential
Regulation Authority and is subject to regulation by the Financial Conduct Authority and to limited regulation by the Prudential Regulation Authority. Details about the extent of our regulation by the
Prudential Regulation Authority are available from J.P. Morgan on request. J.P. Morgan Securities plc (JPMS plc) is a member of the London Stock Exchange and is authorised by the Prudential
Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Registered in England & Wales No. 2711006. Registered Office 25 Bank Street,
London, E14 5JP. South Africa: J.P. Morgan Equities South Africa Proprietary Limited is a member of the Johannesburg Securities Exchange and is regulated by the Financial Services Board. Hong
Kong: J.P. Morgan Securities (Asia Pacific) Limited (CE number AAJ321) is regulated by the Hong Kong Monetary Authority and the Securities and Futures Commission in Hong Kong and/or J.P.
Morgan Broking (Hong Kong) Limited (CE number AAB027) is regulated by the Securities and Futures Commission in Hong Kong. Korea: This material is issued and distributed in Korea by or
through J.P. Morgan Securities (Far East) Limited, Seoul Branch, which is a member of the Korea Exchange(KRX) and is regulated by the Financial Services Commission (FSC) and the Financial
Supervisory Service (FSS). Australia: J.P. Morgan Australia Limited (JPMAL) (ABN 52 002 888 011/AFS Licence No: 238188) is regulated by ASIC and J.P. Morgan Securities Australia Limited
(JPMSAL) (ABN 61 003 245 234/AFS Licence No: 238066) is regulated by ASIC and is a Market, Clearing and Settlement Participant of ASX Limited and CHI-X. Taiwan: J.P.Morgan Securities
(Taiwan) Limited is a participant of the Taiwan Stock Exchange (company-type) and regulated by the Taiwan Securities and Futures Bureau. India: J.P. Morgan India Private Limited (Corporate
Identity Number - U67120MH1992FTC068724), having its registered office at J.P. Morgan Tower, Off. C.S.T. Road, Kalina, Santacruz - East, Mumbai – 400098, is registered with Securities and
Exchange Board of India (SEBI) as a ‘Research Analyst’ having registration number INH000001873. J.P. Morgan India Private Limited is also registered with SEBI as a member of the National Stock
Exchange of India Limited (SEBI Registration Number - INB 230675231/INF 230675231/INE 230675231) and Bombay Stock Exchange Limited (SEBI Registration Number - INB 010675237/INF
010675237). Telephone: 91-22-6157 3000, Facsimile: 91-22-6157 3990 and Website: www.jpmipl.com. For non local research reports, this material is not distributed in India by J.P. Morgan India
Private Limited. Thailand: This material is issued and distributed in Thailand by JPMorgan Securities (Thailand) Ltd., which is a member of the Stock Exchange of Thailand and is regulated by the
Ministry of Finance and the Securities and Exchange Commission and its registered address is 3rd Floor, 20 North Sathorn Road, Silom, Bangrak, Bangkok 10500. Indonesia: PT J.P. Morgan Securities
Indonesia is a member of the Indonesia Stock Exchange and is regulated by the OJK a.k.a. BAPEPAM LK. Philippines: J.P. Morgan Securities Philippines Inc. is a Trading Participant of the Philippine
Stock Exchange and a member of the Securities Clearing Corporation of the Philippines and the Securities Investor Protection Fund. It is regulated by the Securities and Exchange Commission. Brazil:
Banco J.P. Morgan S.A. is regulated by the Comissao de Valores Mobiliarios (CVM) and by the Central Bank of Brazil. Mexico: J.P. Morgan Casa de Bolsa, S.A. de C.V., J.P. Morgan Grupo
Financiero is a member of the Mexican Stock Exchange and authorized to act as a broker dealer by the National Banking and Securities Exchange Commission. Singapore: This material is issued and
distributed in Singapore by or through J.P. Morgan Securities Singapore Private Limited (JPMSS) [MCI (P) 193/03/2016 and Co. Reg. No.: 199405335R], which is a member of the Singapore Exchange
Overweight Marketweight Underweight
Global Sovereign Research Universe 18% 62% 20% IB clients* 50% 43% 56%
Securities Trading Limited and/or JPMorgan Chase Bank, N.A., Singapore branch (JPMCB Singapore), both of which are regulated by the Monetary Authority of Singapore. This material is issued and
distributed in Singapore only to accredited investors, expert investors and institutional investors, as defined in Section 4A of the Securities and Futures Act, Cap. 289 (SFA). This material is not intended
to be issued or distributed to any retail investors or any other investors that do not fall into the classes of “accredited investors,” “expert investors” or “institutional investors,” as defined under Section
4A of the SFA. Recipients of this document are to contact JPMSS or JPMCB Singapore in respect of any matters arising from, or in connection with, the document. Japan: JPMorgan Securities Japan
Co., Ltd. and JPMorgan Chase Bank, N.A., Tokyo Branch are regulated by the Financial Services Agency in Japan. Malaysia: This material is issued and distributed in Malaysia by JPMorgan Securities
(Malaysia) Sdn Bhd (18146-X) which is a Participating Organization of Bursa Malaysia Berhad and a holder of Capital Markets Services License issued by the Securities Commission in Malaysia.
Pakistan: J. P. Morgan Pakistan Broking (Pvt.) Ltd is a member of the Karachi Stock Exchange and regulated by the Securities and Exchange Commission of Pakistan. Saudi Arabia: J.P. Morgan
Saudi Arabia Ltd. is authorized by the Capital Market Authority of the Kingdom of Saudi Arabia (CMA) to carry out dealing as an agent, arranging, advising and custody, with respect to securities
business under licence number 35-07079 and its registered address is at 8th Floor, Al-Faisaliyah Tower, King Fahad Road, P.O. Box 51907, Riyadh 11553, Kingdom of Saudi Arabia. Dubai: JPMorgan
Chase Bank, N.A., Dubai Branch is regulated by the Dubai Financial Services Authority (DFSA) and its registered address is Dubai International Financial Centre - Building 3, Level 7, PO Box 506551,
Dubai, UAE.
Country and Region Specific Disclosures U.K. and European Economic Area (EEA): Unless specified to the contrary, issued and approved for distribution in the U.K. and the EEA by JPMS plc. Investment research issued by JPMS plc has
been prepared in accordance with JPMS plc's policies for managing conflicts of interest arising as a result of publication and distribution of investment research. Many European regulators require a firm
to establish, implement and maintain such a policy. Further information about J.P. Morgan's conflict of interest policy and a description of the effective internal organisations and administrative
arrangements set up for the prevention and avoidance of conflicts of interest is set out at the following link https://www.jpmorgan.com/jpmpdf/1320678075935.pdf. This report has been issued in the
U.K. only to persons of a kind described in Article 19 (5), 38, 47 and 49 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (all such persons being referred to as "relevant
persons"). This document must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this document relates is only available to relevant
persons and will be engaged in only with relevant persons. In other EEA countries, the report has been issued to persons regarded as professional investors (or equivalent) in their home jurisdiction.
Australia: This material is issued and distributed by JPMSAL in Australia to "wholesale clients" only. This material does not take into account the specific investment objectives, financial situation or
particular needs of the recipient. The recipient of this material must not distribute it to any third party or outside Australia without the prior written consent of JPMSAL. For the purposes of this
paragraph the term "wholesale client" has the meaning given in section 761G of the Corporations Act 2001. Germany: This material is distributed in Germany by J.P. Morgan Securities plc, Frankfurt
Branch and J.P.Morgan Chase Bank, N.A., Frankfurt Branch which are regulated by the Bundesanstalt für Finanzdienstleistungsaufsicht. Hong Kong: The 1% ownership disclosure as of the previous
month end satisfies the requirements under Paragraph 16.5(a) of the Hong Kong Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission. (For research
published within the first ten days of the month, the disclosure may be based on the month end data from two months prior.) J.P. Morgan Broking (Hong Kong) Limited is the liquidity provider/market
maker for derivative warrants, callable bull bear contracts and stock options listed on the Stock Exchange of Hong Kong Limited. An updated list can be found on HKEx website:
http://www.hkex.com.hk. Japan: There is a risk that a loss may occur due to a change in the price of the shares in the case of share trading, and that a loss may occur due to the exchange rate in the case
of foreign share trading. In the case of share trading, JPMorgan Securities Japan Co., Ltd., will be receiving a brokerage fee and consumption tax (shouhizei) calculated by multiplying the executed price
by the commission rate which was individually agreed between JPMorgan Securities Japan Co., Ltd., and the customer in advance. Financial Instruments Firms: JPMorgan Securities Japan Co., Ltd.,
Kanto Local Finance Bureau (kinsho) No. 82 Participating Association / Japan Securities Dealers Association, The Financial Futures Association of Japan, Type II Financial Instruments Firms
Association and Japan Investment Advisers Association. Korea: This report may have been edited or contributed to from time to time by affiliates of J.P. Morgan Securities (Far East) Limited, Seoul
Branch. Singapore: As at the date of this report, JPMSS is a designated market maker for certain structured warrants listed on the Singapore Exchange where the underlying securities may be the
securities discussed in this report. Arising from its role as designated market maker for such structured warrants, JPMSS may conduct hedging activities in respect of such underlying securities and hold
or have an interest in such underlying securities as a result. The updated list of structured warrants for which JPMSS acts as designated market maker may be found on the website of the Singapore
Exchange Limited: http://www.sgx.com.sg. In addition, JPMSS and/or its affiliates may also have an interest or holding in any of the securities discussed in this report – please see the Important
Disclosures section above. For securities where the holding is 1% or greater, the holding may be found in the Important Disclosures section above. For all other securities mentioned in this report,
JPMSS and/or its affiliates may have a holding of less than 1% in such securities and may trade them in ways different from those discussed in this report. Employees of JPMSS and/or its affiliates not
involved in the preparation of this report may have investments in the securities (or derivatives of such securities) mentioned in this report and may trade them in ways different from those discussed in
this report. Taiwan: This material is issued and distributed in Taiwan by J.P. Morgan Securities (Taiwan) Limited. India: For private circulation only, not for sale. Pakistan: For private circulation only,
not for sale. New Zealand: This material is issued and distributed by JPMSAL in New Zealand only to persons whose principal business is the investment of money or who, in the course of and for the
purposes of their business, habitually invest money. JPMSAL does not issue or distribute this material to members of "the public" as determined in accordance with section 3 of the Securities Act 1978.
The recipient of this material must not distribute it to any third party or outside New Zealand without the prior written consent of JPMSAL. Canada: The information contained herein is not, and under
no circumstances is to be construed as, a prospectus, an advertisement, a public offering, an offer to sell securities described herein, or solicitation of an offer to buy securities described herein, in Canada
or any province or territory thereof. Any offer or sale of the securities described herein in Canada will be made only under an exemption from the requirements to file a prospectus with the relevant
Canadian securities regulators and only by a dealer properly registered under applicable securities laws or, alternatively, pursuant to an exemption from the dealer registration requirement in the relevant
province or territory of Canada in which such offer or sale is made. The information contained herein is under no circumstances to be construed as investment advice in any province or territory of
Canada and is not tailored to the needs of the recipient. To the extent that the information contained herein references securities of an issuer incorporated, formed or created under the laws of Canada or a
province or territory of Canada, any trades in such securities must be conducted through a dealer registered in Canada. No securities commission or similar regulatory authority in Canada has reviewed or
in any way passed judgment upon these materials, the information contained herein or the merits of the securities described herein, and any representation to the contrary is an offence. Dubai: This report
has been issued to persons regarded as professional clients as defined under the DFSA rules. Brazil: Ombudsman J.P. Morgan: 0800-7700847 / [email protected].
General: Additional information is available upon request. Information has been obtained from sources believed to be reliable but JPMorgan Chase & Co. or its affiliates and/or subsidiaries (collectively
J.P. Morgan) do not warrant its completeness or accuracy except with respect to any disclosures relative to JPMS and/or its affiliates and the analyst's involvement with the issuer that is the subject of the
research. All pricing is indicative as of the close of market for the securities discussed, unless otherwise stated. Opinions and estimates constitute our judgment as of the date of this material and are
subject to change without notice. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The
opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments
or strategies to particular clients. The recipient of this report must make its own independent decisions regarding any securities or financial instruments mentioned herein. JPMS distributes in the U.S.
research published by non-U.S. affiliates and accepts responsibility for its contents. Periodic updates may be provided on companies/industries based on company specific developments or
announcements, market conditions or any other publicly available information. Clients should contact analysts and execute transactions through a J.P. Morgan subsidiary or affiliate in their home
jurisdiction unless governing law permits otherwise.
"Other Disclosures" last revised July 9, 2016.
Copyright 2016 JPMorgan Chase & Co. All rights reserved. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of