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January 5, 2010
EMBIG GBI-EM Global Div CEMBI Broad Fed funds 10-year bond
Source: J.P. Morgan
Feb 09 May 09
Aug 09
Nov 09
-38.5 -54.5 -35.0 -18.0 -26.6 -1.9 -10.9 -16.8 -5.2 -3.8 11.7
23.5
74.5
Joyce ChangAC
(1-212) 834-4203 joyce.chang@jpmorgan.com J.P. Morgan Securities Inc.
2008
2009
1. J.P. Morgan commodity total return index 2. Barclays Capital Global Aggregate Source: J.P. Morgan The certifying analyst(s) is indicated by the notation AC. See last page of the report for analyst certification and important legal and regulatory disclosures.
www.morganmarkets.com
Emerging Markets Outlook and Strategy J.P. Morgan Securities Inc. Joyce ChangAC (1-212) 834-4203 joyce.chang@jpmorgan.com
Market Overview
The January effect supports higher beta credits
Since we issued our 2010 year-ahead report on November 30, 2009, EM fixed income has rallied, with the exception of EM European local currencies that suffered amid the EUR weakening on the back of negative news from Greece and Dubai. There are few signs of the EM rally losing momentum this month and CEEMEA currencies appreciated on the first two trading days of the year amid dollar weakness. Inflows into EM are on the rise and increasingly diversified, including sovereign wealth funds, Japanese retail flows, crossover investors and US pension funds. We continue to forecast robust growth in EM (5.9%oya versus 2.8% in developed market economies), declining default rates, and rating upgrades that will bring the EMBIG into investment grade this year. We stay with our year-end 2010 forecasts of 250bp and 325bp for the EMBIG and CEMBI Broad, respectively, although we believe that these levels could be achieved as early as 1Q10 as strong technicals factors support spreads. The January effect is apparent as investors bought assets starting in December in anticipation of new institutional funds being deployed in the new year. EM spreads have tightened during the December-January period in 9 of the last 10 years. Our client survey for December 2009 also showed that trading accounts significantly reduced risk into year-end, a move we believe is consistent with broader reductions in hedge fund risk across multiple markets and into cash. We expect this de-risking to similarly contribute to stronger performance at the beginning of this year as cash is redeployed. In addition, coupons and amortizations for the EMBIG are highest this quarter and exceed US$21 billion, which is nearly 40% of the US$56.4 billion of sovereign cash flows estimated for the whole year. We forecast only US$67.5 billion of sovereign issuance this year, with Argentina, Poland, Russia, Turkey, and Venezuela to account for nearly half of the projected total. We reiterate 10 investment themes and risk to monitor in 2010 and see the balance of risk for EM skewed to the upside this year (see Emerging Markets Outlook and Strategy for 2010, November 30, 2009): 1) EM economic growth to exceed potential, prompting earlier tightening in EM than DM countries 2) EM policymakers become increasingly interventionist 3) EM countries will consolidate fiscal accounts much faster than DM countries
2
4) Commodity windfalls could substantially lower the financing needs for EM oil exporters 5) Official creditor support for EM countries remains strong 6) Access down the credit curve to increase as EM issuance goes up 7) EM fixed income inflows will play catch up in 2010 8) EM ratings upgrades will exceed downgrades during 2010, with EMBIG reaching investment grade status 9) Heavy election calendar could contribute to greater market volatility in 2H10 10) AUM benchmarked to the EM family of indices to increase
Emerging Markets Outlook and Strategy J.P. Morgan Securities Inc. (1-212) 834-4203 Joyce joyce.chang@jpmorgan.com J.P. Morgan Securities Ltd. William Oswald (44-20) 7777-3020 william.a.oswald@jpmorgan.com ChangAC
We maintain our forecast for EM corporate spreads to reach 325bp at the end of 2010, with risks to the upside as the potential negative implications from the standstill at Dubai World on broader markets has been modest as expected. We see the relative value arguments on a likefor-like credit basis for crossover investors remaining firmly in place, while the continuing rebalancing of EM corporate indices toward higher-quality assets is likely to continue as quasi-sovereign and high grade corporate supply is expected to account for approximately 80% of our US$128 billion 2010 new issue forecast. We continue to favor the new-issue market for adding risk in 1Q10 as EM corporate issuers move to meet their external financing needs as early in the new year as possible, while interest rates remain at record low levels. Looking out further into 2010, we would favor a more active approach to rotating out of lower-beta credits and into higher-beta opportunities in order to enhance overall returns, while selectively taking profits in names that participate in an expected early 2010 credit rally and reach aggressive stand-alone credit valuations.
Forecast return
Now to end-2010 11.8% 17.8% 17.4% 17.4% 16.2% 14.4% 11.8% 9.4% 9.2% 7.1% 7.1% 6.1% 5.1% 4.0%
Yield 7.1% 8.0% 5.7% 7.1% 8.9% 8.8% 11.8% 10.4% 7.7% 3.9% 4.1% 5.9% 7.9% 7.2%
Forecast 7.9% 8.0% 5.5% 6.9% 10.5% 8.3% 11.8% 11.0% 7.6% 5.0% 4.9% 6.3% 10.0% 7.8%
Local return 2.7% 2.4% 5.0% 4.7% -0.1% 4.9% 4.6% 1.6% 3.5% 0.2% -0.0% 3.8% -5.8% 1.9%
Current FX 28.8 2.78 180 1.49 7.53 1.73 9,575 13.0 3.39 33.2 2.88 5.46 1969
Forecast FX 26.7 2.54 167 1.38 7.40 1.75 9,500 13.0 3.15 31.0 2.80 5.40 2,000
FX return 8.9% 15.0% 11.8% 12.1% 16.3% 9.0% 6.8% 7.7% 5.5% 6.9% 7.1% 2.2% 11.6% 2.1%
Emerging Markets Outlook and Strategy J.P. Morgan Securities Inc. J.P. Morgan Securities Ltd. Joyce ChangAC (1-212) 834-4203 joyce.chang@jpmorgan.com William Oswald (44-20) 7777-3020 william.a.oswald@jpmorgan.com
outlook remains for the short USD trade to continue, we are wary of near-term USD strength. The market is beginning 2010 with renewed interests to be short USD, but USDbuying remains a risk near-term should the US economic data and employment outlook continue to improve. Table 1 on the previous page highlights our bottoms-up forecasts for EM local markets debt returns for 2010 as tracked in the GBI-EM Global Diversified, which is the dominant EM local markets benchmark (USD unhedged).
Our new unique dataset on Japanese investment trust flows to Emerging Markets, not included above, showed a strong pickup throughout 2009. Most of the inflows to EM local currency funds were allocated to Brazilian domestic government debt, but inflows to EM hard currency funds reached US$7.5 billion by year-end, almost all of this coming in 4Q09. These inflows, however, were dominated by double-decker FX overlay strategies, with end-investors buying EM sovereign credit overlaid with long BRL positions. We expect this strong carry focus from Japanese investors to remain an important source of inflows in 2010.
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: J.P. Morgan
January 5, 2010
Emerging Markets Outlook and Strategy JPMorgan Chase Bank N.A., Singapore Branch David FernandezAC (65) 6882-24613 david.fernandez@jpmorgan.com Bert GochetAC (852) 2800-8325 bert.j.gochet@jpmorgan.com Claudio PironAC (65) 6882-2218 claudio.piron@jpmorgan.com Yen Ping HoAC (65) 6882-2216 yenping.ho@jpmorgan.com
Pakistan: Sell Pakistan bonds vs. buy Sri Lanka bonds Vietnam: Buy 5-year CDS
Entry: 6.7960; stop: 6.9150; last: 6.7373. Robust macro data are underlining our view for eventual monetary tightening via rates and FX this year. While policy inaction remains likely near-term, the data are tracking our longer-term tightening view. Position via longer-dated NDFs. Our 12-month NDF position entered August 21 is currently up 84bp and we remain in this trade. Entry 10,230; stop 9,900; last 9,339. USD/IDR should remain under pressure in view of conducive risk appetites and attractive carry. USD strength is a risk to this trade, but the central bank, having intervened to cap USD/IDR upside, appears to show little appetite for a weaker IDR. Our NDF position entered August 13 is currently up 953bp. We remain biased to sell into short-term market rallies. Stop: -200bp; last: +358bp. We were long KRW, TWD, and SGD against USD as a core exposure to recovery trades in EM Asia. The position expired at a 358bps profit in December. We see further scope for gains in this trade but await the passage of key data risks this week (US payrolls could turn positive) before re-entering.
Asia: Be long KRW, INR, and SGD against USD EM Asia rates China: 2s/5s steepeners Pay 5-year repo IRS
We expect the IRS curve to rise in 2010, in a bear steepening move in 1Q. The short end of the IRS curve will remain anchored by an unchanged monetary policy in 1Q, until PBoC lets its 1-year bill yield rise (sometime in 2Q). The long end of the IRS curve (5-year) should face upward pressure all year, as a climbing CPI and bond supply take their toll. Hence, we stay with our 1s/5s IRS curve steepener, which is currently trading at 163bp, and target 190bp. Also, we suggest a new trade where we pay 5-year IRS outright at 3.70% (target 4.20%). In 2010, we expect India's OIS curve to rise by a further 50bp. This will happen when liquidity drops, RBI's tightening picks up pace, and when bond supply takes its toll (on the long end). However, significant liquidity withdrawal is not imminent, and the call rate might continue to hug the bottom of the corridor even if RBI hikes CRR by 50bp in January. Hence we pay 5y swap, but we hedge the costly negative carry on the position by receiving 1/3rd of the DV01 with a received position in 1y swap. For the technical details of the trade, see our research piece. Finally, we keep the 3s/10s steepener in Taiwan swaps at 83bp. We do not see that much upside to the curve itself, perhaps 10bp on a three-month horizon. But this is one of our favorite carry trades in the region. The CBC will only hike when the Fed does, i.e., in 2011, and even then it will only do so symbolically in very tiny steps, just as it has done in the past. Meanwhile, the back end of the swap curve will be supported by payers from both onshore and offshore.
India: Pay 5-year (partially hedged by receiving 1-year to neutralize negative carry) Taiwan: Open 3s/10s steepeners
Source: J.P. Morgan
January 5, 2010
Emerging J.P. Morgan Markets Securities Outlook Inc., and NewStrategy York J.P. Morgan Securities Inc. J.P. Morgan Securities Ltd. Joyce ChangAC (1-212) 834-4203 joyce.chang@jpmorgan.com Michael MarreseAC (1-212) 834-4876 michael.marrese@jpmorgan.com J.P. Morgan Securities Ltd. Robert BeangeAC (44-20) 7777-3246 robert.m.beange@jpmorgan.com William OswaldAC (44-20) 7777-3020 william.a.oswald@jpmorgan.com J.P. Morgan Securities Ltd. Michael TrounceAC (44-20) 7777-4356 michael.j.trounce@jpmorgan.com
CEEMEA FX Turkey: Sell 6-month USD/TRY Russia: Sell 6-month USD/RUB Hungary: Sell 2-month USD/HUF Poland: Sell 12-month EUR/PLN Nigeria: Sell USD/NGN
Target 1.40; stop 1.55; last 1.52. Retail buying of USD, which kept USD/TRY rangebound in 2H09, should slow as the economy recovers from recession. Target 25.5; stop 31.2; last 30.63. USD weakness and rising commodity prices are expected to support RUB. While there is a near-term risk that measures are taken to curb FX borrowing, we believe that the CBR will accept faster appreciation as growth recovers. Target 172; stop: 195; last: 193.90. Hungary is alone in CEEMEA in reporting improving current account and budget deficits. In our view, investor positions in HUF do not reflect the improving economic fundamentals or the high yield. Target 3.80; stop 4.40; last 4.30. PLN is the CEEMEA regions most undervalued currency, in our view, and fear over rising public debt levels should diminish as growth rebounds more strongly than expected. Buy naira based on our confidence that buoyant oil prices and rising oil production will support the Nigerian currency. We see value in selling USD/NGN on temporary spikes above 150 (currently at 149.25) with a 6% yield pickup. We also recommend owning NGN-denominated AAA supranational Eurobonds at yields of around 8%.
CEEMEA Rates South Africa: Long R186 Russia: long 3-year OFZ Turkey: 2-year/5-year steepener, one year forward
Target: 8.3%; stop: 9.5%; current 9.11%. The market is very underweight both outright and relative to the high level of yields. Local issuance remains a concern, but the yield pickup more than reflects this. With the SARB on hold for the medium term and inflation falling, the long end should perform best. Target: 7.25, stop: 10, current: 8.43. The CBR continues to provide liquidity to the local market, both directly and through continued rate reductions, while also emphasizing a need for banks to improve balance sheet quality. With investors also underweight Russia, this combination of carry and active support should continue to move bond yields lower. Stop: -25bp; target: +90bp. The 2-year/5-year slope is only 22bp positively sloped one year forward currently and yet is at 131bp in the spot market. As we believe the CBRT has now paused and potentially ended its easing cycle, we expect the curve to earn significant slide as it remains relatively static (3-month slide on this trade is 44bp).
The combination of local yields above 20% and good prospects for cedi appreciation support our recommendation to Ghana: Long Ghanaian cedi through FX hold a long GHC position through FX forwards (with an expected return of 30%). Current spread: -7bp; 3-year low: -103bp; 3-year high: +13bp. Almost carry; defensive trade. The skew of this pair is forwards for a tighter (more negative) spread. Local specifics were a major drag for the Mexican economy in 2009, while global drivers may dominate in 2010. For Colombia, the conflict with Venezuela, sub-par growth, and a heavy political calendar point to higher risks next year.
Source: J.P. Morgan
January 5, 2010
Emerging J.P. Morgan Markets Securities Outlook Inc., and NewStrategy York J.P. Morgan J.P. Morgan Securities Inc. AC (1-212) Inc. Joyce ChangSecurities 834-4203 joyce.chang@jpmorgan.com Felipe PianettiAC (1-212) 834-4043 felipe.q.pianetti@jpmorgan.com Banco J.P. Morgan S.A. Carlos CarranzaAC (54-11) 4348-3425 carlos.j.carranza@jpmorgan.com Vladimir WerningAC (1-212) 834-4144 vladimir.werning@jpmorgan.com J.P. Morgan Securities Inc. Ben RamseyAC (1-212) 834-4308 benjamin.h.ramsey@jpmorgan.com
Belize: We remain overweight Latin America FX: Brazil: Buy 6-month 1.74/1.62 RKI 1.56 USD put/BRL call (indicative cost 272.4bp) Mexico: Sell USD/MXN Latin America rates Argentina: Buy Bonar 14
Brazil Linkers: Buy May11 inflation Breakeven (Buy NTN-B May11 vs. Pay Apr11 DI + buy 1-month USD/BRL NDF). Target: 6%, Stop 4.5%, last 5.18%. 3-month carry: +0.78% a.r. Brazil DI futures: Receive Jan13 (12.32%) vs. pay Jan15 (12.74%)steepener Chile: Receive 2-year UF swaps
Source: J.P. Morgan January 5, 2010
Emerging Article Title Markets Outlook and Strategy J.P. Morgan Securities Inc. Inc., New York
AC (1-212) (1-212) 834-4203 834-4203 Joyce ChangAC joyce.chang@jpmorgan.com
EMBI Global Pakistan Argentina Ecuador Ukraine Iraq Ghana Dominican Rep Georgia Sri Lanka Serbia Gabon Kazakhstan Venezuela Belize Indonesia El Salvador Russia Uruguay Jamaica Vietnam Bulgaria Lebanon Panama South Africa Hungary Turkey The Philippines Peru Colombia Tunisia Chile Malaysia Mexico Egypt Poland Brazil China
Source: J.P. Morgan
28.18 147.39 132.78 118.30 117.90 99.46 96.80 90.79 81.11 75.31 74.49 72.40 67.90 62.09 60.70 46.91 42.09 41.41 36.67 35.12 32.75 28.19 28.12 25.36 24.83 24.21 24.13 23.75 22.21 16.70 15.73 13.05 12.63 12.25 12.13 12.01 11.38 7.73
CEMBI Broad Ukraine Indonesia Egypt Turkey Nigeria Russia Taiwan Jamaica Argentina China Kazakhstan India Peru Thailand Qatar Korea Mexico Colombia Brazil Panama Philippines UAE Hong Kong Singapore Israel Malaysia Lebanon Bahrain Chile Saudi Arabia Venezuela-16.08
37.49 121.29 108.61 101.58 82.73 78.59 74.66 73.56 56.40 54.15 52.96 50.11 46.74 44.73 38.37 37.03 35.87 35.69 30.33 28.40 27.70 25.73 23.25 21.82 20.30 19.65 18.65 16.33 14.97 13.40 6.41
FX Return -20 GBI-EM Global Div Brazil Broad Indonesia Colombia Peru Egypt Turkey Chile South Africa Russia Hungary Mexico Poland Malaysia Thailand
US$ Hedged 0 20 40 60
January 5, 2010
Emerging Article Title Markets Outlook and Strategy J.P. Morgan Securities Inc. Inc., New York
AC (1-212) (1-212) 834-4203 834-4203 Joyce ChangAC joyce.chang@jpmorgan.com
Total EM sovereign requirements for 2010 are modest at only US$67.5 billion CEEMEA region accounts for nearly 60% of sovereign financing needs Only five countriesArgentina, Poland, Russia, Turkey and Venezuelaaccount for nearly 50% of total EM sovereign issuance needs
Table 2: EM gross sovereign external issuance requirements total only US$67.5 billion in 2010
Country China Indonesia Malaysia Pakistan Philippines Sri Lanka Thailand Vietnam Asia subtotal Angola Belarus Bulgaria Croatia Egypt Gabon Georgia Ghana Hungary Iraq Ivory Coast Kazakhstan Latvia Lebanon Lithuania Morocco Nigeria Poland Romania Russia Serbia South Africa Turkey Ukraine CEEMEA subtotal Argentina Bahamas Barbados Belize Brazil Chile Colombia Costa Rica Dominican Republic Ecuador El Salvador Guatemala Jamaica Mexico Panama Peru Trinidad and Tobago Uruguay Venezuela Latin America subtotal Total
Source: J.P. Morgan
Gross issuance 0 4,000 1,500 0 2,000 750 0 1,000 9,250 1,000 750 1,000 2,500 0 0 500 0 1,817 0 0 500 0 1,000 1,500 500 500 7,200 1,482 9,000 741 3,000 5,500 0 38,490 4,000 0 150 0 2,000 0 1,500 0 600 0 1,000 0 0 3,000 500 1,500 500 0 5,000 19,750 67,490
2010 forecast Cash flows 127 1,222 131 111 3,456 69 3 52 5,170 0 0 197 1,048 88 76 38 64 2,583 157 276 0 25 2,268 346 40 0 4,653 1,281 4,118 144 524 5,818 324 24,066 8,388 0 0 28 5,339 108 1,493 0 223 372 257 88 288 4,686 604 789 33 569 3,874 27,140 56,423
Net issuance -127 2,778 1,369 -111 -1,456 681 -3 948 4,080 1,000 750 803 1,452 -88 -76 463 -64 -766 -157 -276 500 -25 -1,268 1,154 460 500 2,547 201 4,882 597 2,476 -318 -324 14,424 -4,388 0 150 -28 -3,339 -108 7 0 377 -372 743 -88 -288 -1,686 -104 711 467 -569 1,126 -7,390 11,067
January 5, 2010
Emerging Article Title Markets Outlook and Strategy J.P. Morgan Securities Inc. Inc., New York Joyce ChangAC (1-212) 834-4203 joyce.chang@jpmorgan.com J.P. Morgan Securities Ltd. Victoria MilesAC (44-20) 7777-3582 victoria.miles@jpmorgan.com
We forecast US$128 billion of new issuance from EM corporates for 2010 Quasi-sovereign issuance should decline this year to less than 50% of total corporate issuance vs. 65% in 2009 Issuance will continue to be concentrated in investment-grade corporates, accounting for nearly 80% of our full year forecast Heaviest refinancing needs concentrated in the CEEMEA region, with Russia and UAE standing out
Table 3: EM corporate bond and syndicated loan maturities for 2010 exceed US$200 billion
US$ million Country China Hong Kong India Indonesia Korea Malaysia Philippines Singapore Taiwan Thailand Emerging Asia Russia Kazakhstan Ukraine Hungary Kuwait South Africa UAE CEEMEA Argentina Brazil Chile Colombia Mexico Latin America Total Emerging Markets
* Estimates external borrowings issued in foreign currencies. Source: Bloomberg, Dealogic, Bond Radar, and J.P.Morgan.
Loans 7,698 4,324 5,173 3,692 5,352 2,556 1,825 3,539 3,644 1,198 39,754 22,441 2,383 1,667 5,393 2,958 4,767 9,645 83,604 1,040 3,749 3,485 348 7,261 17,262 140,620
Bonds 1,056 4,059 3,005 870 11,427 500 150 1,033 350 320 22,948 12,183 1,548 1,775 2,161 500 423 6,659 30,884 1,278 2,436 300 43 3,483 7,771 61,603
2010 Total 8,754 8,383 8,178 4,562 16,779 3,056 1,975 4,572 3,994 1,518 62,702 34,624 3,931 3,442 7,554 3,458 5,189 16,304 114,488 2,318 6,185 3,785 390 10,744 25,033 202,223
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January 5, 2010
Emerging Article Title Markets Outlook and Strategy J.P. Morgan Securities Inc. Inc., New York Joyce ChangAC (1-212) 834-4203 joyce.chang@jpmorgan.com J.P. Morgan Securities Ltd. Michael MarreseAC (1-212) 834-4876 michael.marrese@jpmorgan.com
J.P. Morgan Securities Inc. Inc., New York Luis OganesAC (1-212) 834-4326 luis.oganes@jpmorgan.com JPMorgan Chase Bank N.A., Singapore Branch David FernandezAC (65) 6882-2461 david.fernandez@jpmorgan.com
Current and potential official support to EM sovereigns exceeds US$500 billion Total of 32 new IMF agreements approved for EM countries since 2008 IMF agreements mainly concluded in EM Europe and Latin America
Table 4: High level of current and potential official creditor support to EM sovereigns
Country US$ billion % of GDP Details Current official support for the Latin America region Argentina 3.3 1.2 New 3.5-year World Bank commitment, which implies net US$0.17 billion per annum inflow versus net US$0.90 billion per annum outflows in past three years. Colombia 2.4 1.0 The bulk of the multilateral lending in governments financing plan is from the World Bank and IADB, and to a lesser degree CAF. Ecuador 1.0 1.8 Through October the government had received about half of the US$1.5 billion it was targeting from regional multilaterals IADB, CAF, and FLAR, but this was supplemented with a US$1 billion oil-linked loan from PetroChina and the IMF SDR allocation (US$350 million). Mexico 77.0 8.6 US$30 billion US Fed swap line and US$47 billion flexible credit line from IMF. Peru 0.6 0.4 World Bank lending is the largest component. Potential official support for the Latin America region Brazil 30.0 2.1 US$30 billion US Fed swap line. Colombia 10.4 4.25 IMF FCL; the government has called this precautionary and it is not intended for use. Peru n/a n/a The government does not rule out the IMFFCL as a possibility, but no formal request has been made. Venezuela n/a n/a Multilaterals (mainly IADB and CAF) increased by US$300 million in 2009 to US$3.2 billion, and this trend could increase in 2010. Current official support for the CEEMEA region Belarus 2.9 4.2 US$2.5 billion from IMF, plus World Bank, EBRD, EIB, and IFC. Ghana 1.8 12.7 US$615 million from IMF, US$1.2 billion from World Bank. Hungary 25.8 19.0 EUR12.5 billion from IMF, EUR6.5 from EU, EUR1 billion from World Bank. Latvia 9.6 34.0 EUR1.7 billion from IMF, EUR3.1 billion from the EU + a total of EUR2.7 billion from neighboring countries, EBRD, WB. Nigeria 0.5 0.3 US$500 million in budget support from the World Bank, within a portfolio of around US$4 billion in total lending. Poland 21.8 5.5 Flexible Credit Line from the IMF (being treated as precautionary). Romania 26.0 15.5 EUR12.9 billion from IMF, EUR5.0 billion from EU, EUR1 billion from EBRD, and EUR1 billion from World Bank. Serbia 3.2 10.0 US$2.0 billion from IMF, US$325 million from EU, and US$900 million from the World Bank. Sub-Saharan 44.5 5.4 Loans outstanding include US$31 billion from the World Bank, US$10.3 billion Africa from the AfDB, and US$3.2 billion from the IMF. Ukraine 19.0 17.0 US$16.4 billion from IMF, plus World Bank, EBRD, EIB and IFC (about US$2.5 billion over the next two years). Potential official support for the CEEMEA region Turkey 45.0 7.3 US$45 billion from multilateral institutions (IMF, World Bank, and EBRD). Bulgaria 7.6 15.0 EUR6 billion from IMF, the EU, EBRD, and World Bank. Lithuania 7.6 15.0 EUR6 billion from IMF, the EU, EBRD, and World Bank. Sub-Saharan 10+ 1.2+ The World Bank provided US$7.8 billion in interest-free credits and grants in Africa FY2009 and expects to match this in the current fiscal year. The AfDB has set up a US$1.5 billion Emergency Liquidity Facility and US$1 billion Trade Finance Initiative, and stands ready to provide budget support too. Current official support for the EM Asia China 7.0 0.2 US$7 billion Chiang Mai Initiative Bilateral Swap Agreement. Hong Kong 29.0 13.5 RMB200 billion PBoC swap line (US$29 billion). Indonesia 34.0 6.6 US$5.5 billion World Bank Public Expenditure Support Facility funded by WB (US$2 billion), ADB (US$1 billion), Australia (US$1 billion), and Japan (US$1.5 billion); RMB100 billion PBoC swap line (US$15 billion); US$14 billion Chiang Mai Initiative Bilateral Swap Agreement. Korea 74.0 8.0 US$30 billion Fed swap line; RMB180 billion PBoC swap line (US$ 26 billion); US$20 billion BoJ swap line; US$23 billion Chiang Mai Initiative Bilateral Swap Agreement. Malaysia 18.0 8.1 RMB80 billion PBoC swap line (US$12 billion); US$6 billion Chiang Mai Initiative Bilateral Swap Agreement. Philippines 11.5 6.8 US$11.5 billion Chiang Mai Initiative Bilateral Swap Agreement. Singapore 30.0 16.5 US$25 billion Fed swap line; US$5 billion Chiang Mai Initiative Bilateral Swap Agreement. Thailand 11.0 4.1 US$11 billion Chiang Mai Initiative Bilateral Swap Agreement.
Note: PBoC swap lines are intended for trade financing; the agreed swap line currency is Yuan, but the possibility to draw financing in reserve currencies is under consideration. Source: J.P. Morgan
January 5, 2010
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Emerging Markets Outlook and Strategy J.P. Morgan Securities Inc. Joyce ChangAC (1-212) 834-4203 joyce.chang@jpmorgan.com
Chart 5: REER valuations for global currencies not back to the previous peak for most EM countries
REER: Percent deviation of current versus 30-year average (except for CEE3 - 12-year average)
40 30 20 10 0 -10 -20 -30 -40 -50 -60 -53.7 AUD NOK BRL NZD CZK PEN IDR CHF HUF PLN PHP EUR CLP COP INR TRY ZAR JPY MYR CAD SEK THB MXN GBP KRW TWD ARS
Source: J.P. Morgan
28.8 28.1 26.5 24.3 22.5 14.8 12.9 12.3 11.1 8.1 7.0 6.7 4.4
1.6
1.4
-7.2
EM FX currency appreciation has been concentrated in commodity currencies Valuations have not reached their previous peak
AUD NOK BRL NZD CZK CHF PEN HUF IDR PHP PLN CLP COP EUR TRY
Mexico is the main underperformer in Latin America, while TWD and KRW stand out in EM Asia
SEK
TWD KRW -30% -20% -10% 0% Peak / Avg 10% 20% 30% 40%
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January 5, 2010
Emerging Markets Outlook and Strategy J.P. Morgan Securities Inc. Joyce ChangAC (1-212) 834-4203 joyce.chang@jpmorgan.com J.P. Morgan Securities Inc. Michael MarreseAC (1-212) 834-4876 michael.marrese@jpmorgan.com
J.P. Morgan Securities Inc. Luis OganesAC (1-212) 834-4326 luis.oganes@jpmorgan.com JPMorgan Chase Bank N.A., Singapore Branch David FernandezAC (65) 6882-2461 david.fernandez@jpmorgan.com
Fears of financial asset and property bubbles, as well as a rise in inflation, have prompted EM central bankers to turn their focus to exit strategies We forecast that 17 of 32 EM countries will move towards monetary policy normalization in 2010 But policymakers will be slow to move and it will be difficult to bring interest rates up as long as central banks resist exchange rate appreciation
Policy stance to end-2010 On hold Tightening On hold On hold Tightening Tightening On hold Tightening Tightening Tightening Easing Tightening Tightening Easing Easing Tightening Tightening Tightening Tightening On hold Tightening Tightening Tightening Tightening Tightening
Timing of initial rate hike 3Q10 1Q10 3Q10 2Q10 3Q10 3Q10 3Q09 3Q10 4Q10 3Q10 3Q10 1Q10 1Q10 3Q10 2Q10 4Q10 3Q10
End 2010 rate forecast 0.125 1.00 1.00 0.10 11.75 2.00 3.50 5.25 2.75 2.25 5.50 4.00 4.00 7.00 3.00 7.50 8.00 5.85 5.50 6.50 3.00 2.50 5.00 1.375 1.75
0.125 0.50 1.00 0.10 8.75 0.50 3.50 4.50 1.25 1.00 6.25 1.25 3.50 7.50 4.00 7.00 6.50 5.31 4.75 6.50 2.00 2.00 4.00 1.25 1.25
January 5, 2010
13
Emerging Article Title Markets Outlook and Strategy J.P. Morgan Securities Inc. Inc., New York
AC (1-212) (1-212) 834-4203 834-4203 Joyce ChangAC joyce.chang@jpmorgan.com
JPMorgan Chase Bank N.A., Singapore Branch David FernandezAC (65) 6882-2461 david.fernandez@jpmorgan.com
EM has contributed more to global GDP growth than all of the developed markets for the past four years We forecast 6.0% growth for EM countries in 2010, above the estimated 5.5% average potential growth rate EM Asia will lead with 7.3% growth, Latin America will benefit from Brazils 6.2% outperformance and also grow above potential
2009 -3.4 -2.5 -5.3 -3.9 -4.8 1.0 -3.2 -4.0 0.1 -1.7 0.3 -1.0 -7.0 1.0 -2.7 4.3 8.6 -3.3 6.8 4.4 0.2 -2.4 1.0 -2.1 -3.0 -2.9 -3.2 -5.8 -4.0 4.7 1.7 -6.5 0.0 0.1 3.2 1.7 -6.0 -8.5 -4.0 -1.9 -5.3 -15.2
2010 2.7 3.3 1.9 2.5 1.7 6.0 4.3 4.0 6.2 5.0 3.0 2.0 3.5 5.5 1.0 7.4 9.5 4.5 7.8 5.5 4.9 5.0 5.0 6.5 5.8 5.5 4.3 -1.5 2.5 5.0 4.9 1.0 3.0 2.5 9.2 3.5 2.0 5.0 1.0 3.0 5.0 3.0
2011 2.8 3.1 1.9 2.6 3.1 5.7 3.4 3.0 4.0 5.0 4.1 3.0 2.5 6.0 2.5 7.2 9.3 4.1 8.3 6.0 4.1 5.0 4.3 5.0 4.8 5.0 4.8 4.5 4.0 5.5 4.5 4.0 4.5 3.0 8.0 4.2 5.0 5.0 2.0 3.5 5.5 5.0
Potential GDP growth 1.6 2.0 1.7 0.8 1.5 5.5 3.4 3.5 4.0 4.2 4.5 3.0 2.5 6.0 3.0 6.9 9.0 4.1 8.0 5.0 4.0 5.5 4.5 4.5 4.5 5.0 4.6 5.0 4.0 6.0 4.4 3.5 4.0 7.0 8.0 4.5 5.0 4.0 6.0 3.2 5.5 4.5
14
January 5, 2010
Emerging Article Title Markets Outlook and Strategy J.P. Morgan Securities Inc. Inc., New York
AC (1-212) (1-212) 834-4203 834-4203 Joyce ChangAC joyce.chang@jpmorgan.com
JPMorgan Chase Bank N.A., Singapore Branch David FernandezAC (65) 6882-2461 david.fernandez@jpmorgan.com
EM policymakers will not tighten fiscal policy too much and have the resources to sustain counter-cyclical measures. EM countries will run an average deficit equivalent to 3% of GDP, down from 4.0% of GDP in 2009, and sharply below the 8.5% of GDP deficit that J.P. Morgan is forecasting for developed market countries There will be fiscal consolidation across all CEEMEA countries in 2010 due in part to the constraints of IMF programs or a desire to enter the Euro area
Table 7: Developed country fiscal deficits now more than double the level of EM countries
% of GDP Developed markets United States Japan Euro area United Kingdom Emerging Economies Latin America Argentina Brazil Chile Colombia Ecuador Mexico Peru Venezuela CEEMEA Czech Republic Hungary Israel Kazakhstan Poland Romania Russia South Africa Turkey Ukraine Emerging Asia China Hong Kong India Indonesia Korea Malaysia Philippines Singapore Taiwan Thailand
Source: J.P. Morgan
2008 -3.3 -3.1 -6.6 -2.0 -6.2 -0.9 -0.8 1.3 -2.0 8.7 0.1 -0.5 -2.0 2.1 -2.2 -0.1 -2.1 -3.8 -2.0 -2.5 -3.6 -5.5 4.1 -1.0 -1.8 -1.4 -1.3 -0.4 0.1 -7.8 0.1 1.3 -4.8 -0.9 5.0 -0.7 -2.5
2009 -8.6 -9.9 -11.3 -6.1 -12.1 -4.1 -3.1 -1.5 -4.3 -3.8 -2.7 -3.5 -2.1 -1.9 -3.5 -6.2 -6.0 -3.9 -5.0 -3.8 -5.6 -8.0 -6.3 -7.4 -6.3 -7.5 -3.8 -3.3 -3.3 -7.3 -2.4 -2.7 -7.1 -3.2 1.0 -3.6 -3.9
2010 -8.5 -9.5 -10.4 -7.1 -11.2 -3.2 -2.8 -1.0 -3.4 -1.6 -3.7 -1.5 -2.8 -1.8 -4.0 -4.9 -4.0 -3.8 -4.0 0.0 -5.5 -6.0 -5.5 -6.2 -3.7 -6.2 -2.8 -2.1 -1.0 -6.8 -1.5 -1.5 -5.0 -2.5 2.5 -3.0 -6.0
January 5, 2010
15
Emerging Markets Outlook and Strategy J.P. Morgan Securities Inc. Joyce ChangAC (1-212) 834-4203 joyce.chang@jpmorgan.com J.P. Morgan Securities Inc. Michael MarreseAC (1-212) 834-4876 michael.marrese@jpmorgan.com
J.P. Morgan Securities Inc. Luis OganesAC (1-212) 834-4326 luis.oganes@jpmorgan.com JPMorgan Chase Bank N.A., Singapore Branch David FernandezAC (65) 6882-2461 david.fernandez@jpmorgan.com
Nearly 40% of the countries in the EMBIG by market capitalization are classified as oil exporters and another 24% are characterized as soft commodity or metals exporters The majority of countries are budgeting the price of oil conservatively at US$45-65/bbl, well below J.P. Morgans 2010 forecast for WTI to average US$78.25/bbl
Table 8: Many EM Countries will benefit from an oil windfall at current 2010 oil price assumptions
Oil exports1 % of total 28.4 66.8 13.5 93.7 98.1 97.7 47.1 85.9 97.7 65.5 96.5 89.5 61.0 1.1 17.0 21.3 0.0 18.1 2.5 24.2 5.6 5.4 Impact of Impact of Oil $1 change in $1 change imports fiscal accounts in exports % of total (%GDP) %GDP US$ million 3.3 19.0 8.2 10.4 0.0 0.0 16.4 0.5 0.0 0.0 2.0 0.0 0.0 10.2 30.0 23.7 19.7 10.7 15.7 28.6 15.5 21.7 0.02 0.13 0.10 0.15 0.70 0.45 0.00 0.19 1.05 0.14 0.29 0.49 0.15 0.00 0.15 -0.01 0.02 0.00 0.00 0.00 0.00 0.00 0.05 0.25 0.23 0.33 0.84 0.67 0.04 0.73 1.15 0.36 0.40 1.00 0.18 0.00 0.03 0.06 0.17 0.01 0.50 0.06 0.04 140 140 500 1,000 1,130 517 41 85 228 420 674 562 3,250 236 300 307 379 13 859 196 101 2010 oil price budget 75.2 65.0 59.0 40.0 37.0 58.0 44.7 n/a 60.0 50.0 57.0 40.0 58.0 n/a 70.0 70.0 63.0 75.0 n/a n/a n/a 80.0 Implicit WTI assumption in 2010 budget 88.2 71.2 61.2 46.2 37.0 58.0 50.0 n/a 60.0 52.0 57.0 40.0 60.0 n/a n/a n/a n/a
Country Latin America Colombia Ecuador Mexico2 Venezuela CEEMEA Algeria Angola Egypt Gabon Iraq Kazakhstan Nigeria Qatar Russia EM Asia China India Indonesia Korea Malaysia Philippines Singapore Taiwan Thailand
1. Including oil derivatives and in some cases natural gas. 2. The impact of $1 change in fiscal accounts represents an estimate of how much goes to the stabilization fund for every $1 above the oil price budget assumption. If the price is below the budget assumption, the price is offset by the oil hedge. Source: J.P. Morgan
16
January 5, 2010
Emerging Markets Outlook and Strategy J.P. Morgan Securities Inc. Joyce ChangAC (1-212) 834-4203 joyce.chang@jpmorgan.com
Number sovereign upgrades to exceed downgrades in 2010, while ratings in DM countries will remain under pressure EMBIG average rating is expected to move to investment grade in 2010 with 60% of the index in the investment grade bucket
Chart 7: EM sovereign rating upgrades are expected to exceed downgrades once again in 2010
45 40 35 30 25 4.0 20 15 10 5 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 YTD 2009 2010 F 3.0 2.0 1.0 0.0 Rating Upgrades Rating Downgrades Up/Down ratio 8.0 7.0 6.0 5.0
* The total number of upgrades and downgrades include both S&P and Moodys actions. Source: J.P. Morgan
January 5, 2010
17
Emerging Markets Outlook and Strategy J.P. Morgan Securities Inc. Joyce ChangAC (1-212) 834-4203 joyce.chang@jpmorgan.com
Assets under management for the external debt EMBI series increased to US$217 billion at end-2009 compared to US$200 billion at end-2008 GBI-EM assets managed against the index series increased to US$55 billion from US$35.8 billion during the same time period Assets under management for the EM corporate market have attracted a small following at US$6.4 billion
Table 9: AUM benchmarked against EM indices increased to US$280 billion during 2009
AUM ($mm) EM Indices Local Market Debt GBI-EM Global Diversified GBI-EM GBI-EM Diversified GBI-EM Broad Diversified GBI-EM Broad GBI-EM Global Total External Debt EMBI Global Diversified EMBI Global EMBI+ Total Corporate External Debt CEMBI Broad Diversified CEMBI Diversified CEMBI Broad CEMBI Total TOTAL AUM managed against EM indices
Source: J.P. Morgan
December 2008
December 2009 14,120 9,045 4,775 6,455 50 1,420 35,865 29,626 11,913 8,193 5,070 105 150 55,056
0 234,861
18
January 5, 2010
Emerging Markets Outlook and Strategy J.P. Morgan Securities Inc. Joyce ChangAC (1-212) 834-4203 joyce.chang@jpmorgan.com J.P. Morgan Securities Inc. Michael MarreseAC (1-212) 834-4876 michael.marrese@jpmorgan.com
J.P. Morgan Securities Inc. Luis OganesAC (1-212) 834-4326 luis.oganes@jpmorgan.com JPMorgan Chase Bank N.A., Singapore Branch David FernandezAC (65) 6882-2461 david.fernandez@jpmorgan.com
29 elections scheduled in EM countries between now and end-2011 Key elections to monitor in Latin America: Colombia and Brazil Key elections to monitor in CEEMEA region: Ukraine and Latvia
Table 10: Heavy election calendar over the next two years in EM
Country Latin America Argentina Brazil Colombia Costa Rica Dominican Republic Guatemala Mexico Peru Venezuela CEEMEA Bahrain Bulgaria Central African Republic Croatia Czech Republic Egypt Gabon Hungary Iraq Latvia Nigeria Poland Russia Turkey Ukraine Emerging Asia Philippines Singapore Sri Lanka Thailand Vietnam
Source: www.electionguide.org
Presidential October 2011 First round: October 3, 2010 Second round: October 31, 2010 First round: May 30, 2010 Second round: June 20, 2010 February 07, 2010 August 2011 April 2011
Legislative/Parliamentary/Municipal
October 3, 2010 March 14, 2010 February 07, 2010 May 16, 2010 August 2011 July 04, 2010 October 03, 2010 April 2011 September 26, 2010 November 2010
September 2011
June 2010 May 2011 April 2011 First round: October 2010
First round: March 2010 November 2011 June 2010 May 2010 November 2010 December 2011 April or May 2010 January 16, 2010 October 02, 2010 April 2011 Spring 2011 or October 2011 December 2011 July 2011
First round: January 17, 2010 Second round: February 2010 May 10, 2010 March 2010 November 2011 June 2011 May 10, 2010 May 2011 March 2010 2H10
January 5, 2010
19
AND
Q UANTITATIVE A NALYSIS
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AND
A FRICA (CEEMEA)
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E MERGING A SIA
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