Emerging Markets Research - JPMorgan Chasemedialibrary... · the objectivity of this report....
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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
Transcript of Emerging Markets Research - JPMorgan Chasemedialibrary... · the objectivity of this report....
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 OganesAC
(212) 834-4326
J.P. Morgan Securities LLC
Emerging Markets Research
EM Outlook for 2017: EM macro and market prospects clouded by US policy uncertainty
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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.
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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.
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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.
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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, $/bbl 47.49 58.00
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We forecast much lower returns in 2017, with local currency outperforming at a 6%
return, while EMBIGD and CEMBI Br returns will be 0.6% and 2.0%, respectively
Key EM returns and technical forecasts for 2017
Source for both charts: J.P. Morgan. Note: As of COB 11/21/2016
2016 YTD returns vs. 2017 forecasted returns; %
Current/YTD 2016F 2017F
EMBIG Div STW; bp 360 375 425
EMBIG Div Total Returns +8.7% 0.6%
CEMBI Broad STW; bp 324 375 400
CEMBI Broad Total Returns +9.6% 2.0%
GBI-EM Yield 6.89% 6.89% 6.85%
GBI-EM FX Return +4.8% -0.7%
GBI-EM US$ 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
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8.7% 9.6%
7.3% 7.9%
-0.7%
0.6%
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6.0% 6.9%
-0.7% -2%
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4%
6%
8%
10%
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EMSovereigns(EMBIGD)
EMCorporates(CEMBI Br)
EM LocalMarkets (GBI-EM GD USD)
Local BondReturns (GBI-
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FX Return(GBI-EM GD)
2016 YTD Return
2017F Return
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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
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-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
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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
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Source for both charts: J.P. Morgan. Note: As of COB 9/7/2016
EMBIGD vs. GBI-EM GD total returns index; Jan. 1st
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EM asset performance in 1Q17 will be determined by the US pro-growth policy
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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
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estr
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Str
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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
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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
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EM Macro Outlook: Parsing the Trump shock to EM 9
EM Technicals: Outflow pressures to persist; modest inflows
of $20bn expected in 2017
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EM Local Markets Strategy 27
EM Hard Currency Strategy 37
Appendix 42
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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
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-50
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EM ex CN less DM growth
Capital flows (right)
Left axis: %-pt, right axis: USD bn 2qma
0.0
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1.2
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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
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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
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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
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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
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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)
Source: J.P. Morgan
Real GDP (%oya)
Inflation (%Dec/Dec)
Current account balance (% GDP)
2016 2017 2018 Potential 2016 2017 2018 2016 2017 2018
DM 1.6 1.8 1.6 1.5 1.3 1.8 2.0 - - -
EM 3.8 4.2 4.5 4.7 3.5 3.6 3.7 1.0 0.9 0.7
EM (ex CN) 2.0 2.8 3.4 3.4 4.5 4.3 3.7 0.2 0.3 0.1
EM Asia 5.9 5.6 5.6 5.9 2.2 2.7 3.4 2.9 2.5 2.3
EMEA EM 1.4 1.9 2.7 3.0 6.0 5.7 4.2 -2.0 -1.3 -1.4
Latam -0.6 1.7 2.6 2.4 5.2 4.3 3.8 -2.1 -2.3 -2.3
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…with the majority of the uplift to come from Latin America, while EMEA EM will
accelerate modestly beyond Russia
Real GDP, consumption, investment and net trade by country Regional GDP growth continues diverging in 2017; %oya
Shaded area denotes forecast
Source for both charts: J.P. Morgan
4
5
6
7
8
9
10
11
12
-2
0
2
4
6
8
10
2010 2011 2012 2013 2014 2015 2016 2017
EMEA EM
Latam
EM Asia (RHS)
%oya for GDP, %-pt contribution for the components; table sorted by change in real GDP
Real GDP Consumption Investment Net Trade
2016 2017 chg 2016 2017 2016 2017 2016 2017
Venezuela -11.0 -1.5 9.5 -11.9 0.0 -4.7 0.4 5.7 -1.9
Argentina -2.1 3.2 5.3 -0.9 2.6 -1.5 2.4 0.2 -1.8
Brazil -3.2 0.8 3.9 -3.6 0.2 -1.2 0.6 1.6 -0.1
Ecuador -1.8 0.4 2.2 -3.0 -0.4 -1.2 0.6 2.5 0.3
Russia -0.6 1.1 1.7 -2.2 0.3 0.6 0.8 1.0 -0.1
Taiwan 1.2 2.1 0.9 1.0 1.2 0.2 0.6 0.0 0.2
Uruguay 0.5 1.2 0.7 0.3 0.6 -1.0 1.2 1.2 -0.6
South
Africa 0.4 1.0 0.6 0.6 0.8 -0.6 0.0 0.4 0.2
Colombia 1.7 2.2 0.5 1.9 1.2 -0.8 1.4 0.6 -0.4
Hungary 2.0 2.5 0.5 2.8 2.0 -1.4 0.9 0.6 -0.5
Chile 1.8 2.3 0.5 1.9 2.0 -1.1 0.6 1.0 -0.3
Peru 4.0 4.5 0.5 2.2 2.3 -0.4 1.7 2.2 0.5
Poland 2.7 3.0 0.3 3.1 2.9 -0.8 0.4 0.4 -0.3
Hong
Kong 1.6 1.8 0.3 1.1 1.8 0.7 0.5 -0.2 -0.5
Indonesia 5.0 5.1 0.1 3.2 3.0 1.3 2.1 0.5 -0.1
Malaysia 4.1 4.1 0.0 3.6 3.3 0.3 1.0 0.1 -0.2
Turkey 2.8 2.8 0.0 3.0 2.7 0.3 0.4 -0.5 -0.2
Singapore 1.0 0.8 -0.1 0.0 0.1 -1.1 -1.4 2.0 2.1
Czech
Republic 2.6 2.5 -0.1 1.5 1.7 -0.2 0.7 1.3 0.1
India 7.2 7.0 -0.2 4.3 4.0 2.3 2.2 0.7 0.8
Israel 3.2 3.0 -0.2 4.6 3.5 1.5 0.7 -2.9 -1.2
China 6.7 6.4 -0.3 4.4 4.3 2.7 2.5 -0.4 -0.5
Korea 2.8 2.3 -0.4 1.8 1.5 1.3 0.5 -0.3 0.3
Mexico 2.2 1.8 -0.5 2.3 1.9 0.1 -0.1 -0.1 -0.1
Philippines 6.8 6.0 -0.7 5.1 4.9 6.2 6.4 -4.5 -5.3
Thailand 3.0 2.0 -1.0 1.6 1.3 0.5 0.8 0.9 -0.2
Romania 4.9 3.5 -1.4 6.8 3.9 1.8 2.4 -3.7 -2.8
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Negative output gaps across EM keep global reflation limited to DM
EM output gap is not reflationary; %-pt Reflation is back in DM, but still far away for EM
CPI inflation %oya, shaded area denotes forecast
Source for both charts: J.P. Morgan
2.5
3.0
3.5
4.0
4.5
0.0
0.5
1.0
1.5
2.0
2.5
2013 2014 2015 2016 2017
DM EM
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-2
-1
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1
2
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06 07 08 09 10 11 12 13 14 15
EM Asia Latam EMEA
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On monetary policy, the majority of EM central banks remain biased towards easing
or remaining on hold
EM monetary policy changes; %-pt
Current End of Period Forecast (%pa) (%pa) Next change 1Q17 2Q17 3Q17 4Q17
Developed 0.30 0.40 0.51 0.51 0.62
Emerging 5.13 5.04 4.83 4.80 4.81
EM Asia 4.08 4.03 3.84 3.84 3.85
China 4.35 2Q 17 (-25bp) 4.35 4.10 4.10 4.10
Hong Kong 0.75 Dec 16 (+25bp) 1.00 1.25 1.25 1.50
India 6.25 Dec 16 (-25bp) 6.00 5.75 5.75 5.75
Indonesia 4.75 On hold 4.75 4.75 4.75 4.75
Korea 1.25 1Q 17 (-25bp) 1.00 1.00 1.00 1.00
Malaysia 3.00 On hold 3.00 3.00 3.00 3.00
Philippines 3.00 On hold 3.00 3.00 3.00 3.00
Taiwan 1.38 On hold 1.38 1.38 1.38 1.38
Thailand 1.50 On hold 1.50 1.50 1.50 1.50
EMEA EM 5.76 5.92 5.92 5.93 5.93
Czech Republic 0.05 1Q 18 (+20bp) 0.05 0.05 0.05 0.05
Hungary 0.90 On hold 0.90 0.90 0.90 0.90
Israel 0.10 4Q 17 (+15bp) 0.10 0.10 0.25 0.25
Nigeria 14.00 On hold 15.00 15.00 15.00 15.00
Poland 1.50 On hold 1.50 1.50 1.50 1.50
Romania 1.75 Feb 2018 (+25bp) 1.75 1.75 1.75 1.75
Russia 10.00 Jun 17 (-50bp) 10.00 9.50 9.00 8.50
South Africa 7.00 On hold 7.00 7.00 7.00 7.00
Turkey* 7.79 Jan 18 (-25bp) 7.75 7.75 7.75 7.75
LatAm 9.54 8.99 8.52 8.28 8.36
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
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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
Hungary -1.7 -1.7 -2.1 Easier -1.5 -2.5 Expansion
Czech Rep. -2.6 -2.6 -2.0 Tightening 0.0 -0.4 Expansion
Israel -1.1 -1.1 -1.7 Easier -2.4 -2.5 Expansion
Hong Kong -1.9 -1.6 -1.2 Tightening 0.4 0.2 Expansion
Korea -1.1 -1.1 -1.0 Tightening 0.9 1.5 Contraction
Romania -1.7 -1.7 -1.0 Tightening -2.6 -3.0 Expansion
Poland -0.2 -0.2 -0.8 Easier -2.4 -3.0 Expansion
Philippines -0.2 -0.2 -0.7 Easier -1.9 -2.3 Expansion
Thailand -0.3 -0.3 -0.5 Easier -3.0 -3.5 Expansion
Turkey 1.3 1.2 -0.2 Easier -1.5 -1.9 Expansion
Malaysia 0.1 0.1 0.0 Easier -3.1 -3.0 Contraction
Taiwan 0.3 0.3 0.1 Easier -1.8 -2.2 Expansion
India* 0.8 0.6 0.2 Easier -7.1 -7.0 Contraction
Chile 0.5 0.5 0.3 Easier -3.1 -3.3 Expansion
Indonesia 0.4 0.4 0.3 Easier -2.7 -2.5 Contraction
South Africa 1.2 1.2 1.4 Tightening -3.4 -3.1 Contraction
Peru 1.8 1.8 1.8 Tightening -3.0 -2.5 Contraction
China** 2.4 2.4 1.9 Easier -10.9 -11.5 Expansion
Colombia 4.4 4.4 3.0 Easier -3.9 -3.3 Contraction
Mexico 2.2 2.7 3.3 Tightening -3.0 -2.5 Contraction
Russia 4.1 4.1 4.5 Tightening -3.3 -1.6 Contraction
Brazil 8.0 7.7 5.7 Easier -10.4 -9.5 Contraction
18
Agenda
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EM Technicals: Outflow pressures to persist; modest
inflows of $20bn expected in 2017
19
EM Macro Outlook: Parsing the Trump shock to EM 9
EM Local Markets Strategy 27
EM Hard Currency Strategy 37
Appendix 42
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With little transparency regarding US policies and implications on EM, fund flow and
positioning technicals could continue to add downward pressures
Large negative returns will likely lead to additional
outflows
EM exposure levels had moved higher before the
elections
Source: J.P. Morgan November EM Client Survey
0.70
-0.41
0.16
0.29
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
08 09 10 11 12 13 14 15 16
Sovereigns Corporates
FX Rates
Investor positioning in EM assets as of November EM Client Survey Cumulative EMBIGD returns versus cumulative EM hard currency retail
flows
-30
-20
-10
0
10
20
30
40
-15
-10
-5
0
5
10
15
20
Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16
Cumulative EMBIGD returns (lhs)
Cumulative hard currency inflows ($bn, rhs)
Source: J.P. Morgan, EPFR Global, Bloomberg
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7 Retail outflows are likely going to persist near term, as the impact of outflows and
negative returns continue to play out in future fund flows
Hard currency flows post-taper tantrum model Local currency flows post-taper tantrum model
Source: J.P. Morgan, EPFR
Dependent variable: weekly local currency flows, $mn
Source: J.P. Morgan, EPFR Global, Bloomberg
coeff std.
error t-stat p-val
GBI-EM returns (weekly) 186.8 44.9 4.2 0.000
One-week lag of GBI-EM returns 162.4 46.5 3.5 0.001
One-week lag of local ccy flows 0.7 0.0 15.2 0.000
AR term -0.4 0.1 -5.3 0.000
Constant -92.2 21.8 -4.2 0.000
R-Square 0.50
Durbin-Watson 2.00
Dependent variable: weekly hard currency flows, $mn
coeff std.
error t-stat p-val
EMBIGD returns (weekly) 178.4 36.6 4.9 0.000
One-week lag of EMBIGD returns 124.5 38.1 3.3 0.001
One-week lag of hard ccy flows 0.7 0.1 11.4 0.000
VIX -21.6 10.3 -2.1 0.037
AR term -0.2 0.1 -2.2 0.031
Constant 312.0 162.2 1.9 0.056
R-Square 0.57
Durbin-Watson 2.04
Post-taper tantrum hard currency flows model vs. actual;
$ mn, retail flows
Source: for both charts :J.P. Morgan, EPFR
-1000
0
1000
2000
3000
4000
5000
6000
7000
8000
-3000
-2000
-1000
0
1000
2000
3000
4000
Jan 16 Feb16
Mar16
Apr 16 May16
Jun 16 Jul 16 Aug16
Sep16
Oct 16
Residuals (RHS)
Actual
Fitted
Brexit
Post-taper tantrum local currency flows model vs. actual;
$ mn, retail flows
-1000
0
1000
2000
3000
4000
5000
6000
7000
8000
-2000
-1500
-1000
-500
0
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1000
1500
Jan 16 Feb16
Mar16
Apr 16 May16
Jun 16 Jul 16 Aug16
Sep16
Oct 16
Residuals (RHS)
Actual
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The recent decline in EM risk-adjusted returns is a risk to strategic flows in 2017, but
the structural under-allocation to EM can continue to attract inflows, in our view
Sharpe ratios improved significantly this year but have seen a recent downturn
Source: J.P. Morgan.
-3
-2
-1
0
1
2
3
4
5
6
7
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-2
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6
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0916
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Local Hard
GBI-EM GD USD Sharpe ratio EMBIGD Sharpe ratio
CEMBI Br Sharpe ratio
Rolling 1y Sharpe ratios across EMBIGD, CEMBI Br and GBI-EM (rhs) and quarterly strategic inflows; USD bn (lhs)
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Non-resident buying of EM local bonds continued at a more modest pace of $23bn in 2016
Some countries have already been experiencing non-resident outflows YTD; annual foreign purchases of local ccy bonds, $bn
Foreigner and dedicated flows into local debt; USD bn
Country 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Brazil 4.5 15.8 19.6 39.8 11.6 22.9 35.6 36.3 26.9 -15.6
Colombia - - - - - - 2.8 9.4 2.5 5.5
Czech Republic - - - - 0.7 -0.6 1.8 0.2 4.0 3.9
Hungary 1.9 -3.9 -2.4 1.8 6.1 5.0 -1.0 0.9 -4.0 -1.2
India - - - - - - -0.5 1.5 0.2 0.3
Indonesia 2.6 1.3 2.2 9.7 3.2 5.0 5.0 11.8 7.5 9.5
Israel -0.4 -1.5 1.8 9.7 -2.5 -3.6 -2.5 3.9 -0.6 0.1
Korea 21.9 -4.0 6.2 17.6 12.1 -3.4 1.3 6.8 1.9 5.3
Malaysia 3.9 0.3 3.5 10.1 9.4 8.8 2.5 2.6 4.6 4.8
Mexico 7.4 5.6 3.5 21.4 32.1 44.4 21.2 21.7 0.8 -6.6
Peru - - - - - 1.7 0.2 -0.7 0.2 1.0
Poland -1.3 -8.0 7.8 15.2 9.9 11.2 1.1 0.9 2.9 -1.4
Romania - - - 0.9 0.9 0.3 3.0 0.3 -0.2 0.8
Russia - - - - - 17.5 7.8 -0.4 3.5 4.7
South Africa 0.9 -1.6 3.3 7.4 7.1 11.3 2.9 -1.1 0.4 9.8
Thailand - - 0.7 3.4 3.9 6.2 3.3 1.0 -2.0 1.0
Turkey -3.2 -4.8 -2.0 10.9 14.7 16.2 4.3 0.4 -7.0 1.1
Latin America 11.9 21.4 23.1 61.2 43.7 69.0 59.8 66.8 30.4 -15.7
EMEA EM -2.2 -19.9 8.4 45.8 36.9 57.4 17.4 5.1 3.4 17.8
EM Asia 28.4 -2.4 12.6 40.8 28.6 16.6 11.6 23.6 12.1 20.8
Total 38.1 -0.9 44.1 147.8 109.3 143.0 88.8 95.6 45.9 22.8
Source (top chart): J.P. Morgan, EPFR Global
Source (bottom chart): J.P. Morgan, Central Banks, Bloomberg, Finance Ministries, data as of Sept-16
23.1
4.0 9.8
41.5 31.2 30.2
12.2 0.0
-8.1
13.9
38.1
-0.9
44.1
147.8
109.3
143.0
88.8 95.6
45.9
22.8
-20
0
20
40
60
80
100
120
140
160
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016YTD
Dedicated EM local ccy fund flows;USD bn
Non-resident inflows; USD bn
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small corporate issuance, and rising local issuance
Hard currency and local market bond supply (USD bn) vs. EM fixed income flows (USD bn)
Note: EM Asia countries include: China, India, Indonesia, Korea, Malaysia, Taiwan and Thailand. EMEA EM countries include Poland, Russia, Turkey and
South Africa. Latam countries include: Brazil, Colombia, Mexico, Peru
Source: J.P. Morgan, Bloomberg, EPFR, Bond Radar, Finance Ministries and Central Banks
24
2014 2015 2016 YTD 2017F
EM sovereign supply 90 81 129 108
EM corporate supply 373 239 285 315
EM local markets 374 401 471 517
EM Asia local markets 292 326 395 432
EMEA EM local markets 29 33 40 44
Latam local markets 53 42 36 41
EM fixed income fund flows 11 -15 49 20
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7 EM sovereign hard currency issuance is expected at $108.4bn in 2017, lower than 2016,
while EM corporate gross issuance to increase by +5%
EM sovereign issuance; $ bn
US$bn 2013 2014 2015 2016 YTD 2016F 2017F
Gross issuance (a) 70.1 90.2 81.0 128.9 129.4 108.4
Estimated cash flows (b =
c+d) 61.3 79.9 85.0 70.0 72.6 86.9
Amortizations (c) 26.5 37.8 43.9 26.2 26.9 41.4
Coupons (d) 40.6 42.1 41.1 43.8 45.7 45.5
Net issuance (e = a-c) 43.6 52.4 37.1 102.7 102.5 67.0
Net financing (f = a-b = e-d) 8.8 10.3 -4.0 58.9 56.9 21.5
Source for both charts: Bloomberg, Bond Radar, J.P. Morgan
25
EM corporate issuance; $ bn
US$bn 2013 2014 2015 2016YTD 2017F
Gross issuance (a) 366 373 239 285 315
Estimated cash flows (b = c+d) 121 158 190 179 260
Amortizations (c) 55 77 102 104 177
Coupons (d) 67 81 88 75 84
Net issuance (e = a-c) 311 296 137 182 138
Net financing (f = a-b = e-d) 244 215 49 106 55
Tender/Buyback/Calls (g) 20 30 38 52 40
Net issuance after
tender/buyback/call (j = e-g) 291 266 99 130 98
Net financing after
tender/buyback/call (k = f-g) 224 185 11 54 15
E M
T
E C
H N
I C
A L
S :
O U
T F
L O
W P
R E
S S
U R
E S
T
O
P E
R S
I S
T ;
M O
D E
S T
I N
F L
O W
S
O F
$
2 0
B N
E
X P
E C
T E
D
I N
2
0 1
7
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)
Brazil NTNF BRLbn 51.4 75.8 71.2 65 22 23 20 19 -9% -1.8
Mexico Mbonos MXNbn 331 248 123 240 25 16 7 13 95% 5.7
Colombia TES COPtr 6.5 5.7 22 23 3 2 7 8 5% 0.3
Peru Sob PENbn 7.4 4.4 6.3 5 3 1 2 1 -21% -0.4
China CGB CNYbn 741 980 1500 1800 120 156 227 272 20% 43.5
India** Gsecs INRbn 4689 4469 4406 4251 77 70 66 63 -4% -2.3
Indo C+Suk. IDRtn 256 381 408 385 22 28 31 29 -6% -1.7
Korea KTB KRWtn 46 58 56 52 44 51 48 45 -7% -3.4
Malaysia Mgs+GII MYRbn 38 39 40 42 12 10 10 10 5% 0.5
Taiwan TGB TWDbn 270 140 69 71 9 4 2 2 3% 0.1
Thailand* THAIGB THBbn 250 250 390 390 8 7 11 11 0% 0.0
Poland T-bonds PLNbn 39 19 44 51 12 5 11 13 16% 1.7
Russia OFZs RUBbn -151 387 535 656 -4 6 8 10 23% 1.9
Turkey T-bonds TRYbn 11 28 34 38 5 10 11 13 11% 1.2
SA T-bonds ZARbn 170 152 151 112 16 12 10 8 -26% -2.7
Total 374 401 471 517 9% 42.5
26
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27
EM Local Markets Strategy 27
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 Hard Currency Strategy 37
Appendix 42
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Uncertainty surrounding President-elect Trump’s policy framework is likely to be
the key driver of EM FX sentiment into 2017
Currency winners and losers across four different policy selections (aggressive and soft fiscal or growth policies)
Source: J.P. Morgan
OW stands for a likely outperforming currency, UW for a likely underperforming currency
28
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EM FX valuations show Latam and EMEA EM currencies are no longer cheap, with
Asia currencies still looking expensive
Latam and EMEA REER are currently not as rich as back in
May 2013 (prior taper tantrum), unlike EM Asia…
…consistent with the cross-sectional distribution
Source: J.P.Morgan
% deviation from REER FV, (+) implies real appreciation
-6
-4
-2
0
2
4
6
Jan-07 Jul-08 Jan-10 Jul-11 Jan-13 Jul-14 Jan-16
EM Asia EMEA EM LATAM FX
Pre taper tantrum
% deviation from REER FV, (+) implies real appreciation
-15
-10
-5
0
5
10
15
20
CN
Y
MX
N *
IDR
KR
W
SG
D
RU
B
BR
L
INR
ZA
R
ILS
PH
P
CLP
CO
P
PE
N
HU
F
TW
D
TH
B
TR
Y
PLN
CZ
K
MY
R
MX
N
+/- S.E.
REER FV misalignment
Note: MXN* stands for MXN REER if a regime change implying trade restrictions
equivalent to a 10% average tariff, while MXN stands for the status quo in terms
of US-MX trade relations.
Source: J.P. Morgan
29
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EM rates will rise if the DM selloff persists, as EM betas tend to increase over US
selloff periods and real yields are forecasted to become less attractive in 2017
Source for all charts: Bloomberg, J.P. Morgan
Real rates expected to compress next year EM will likely be pressured if DM rates selloff
EM nominal yields are still high versus DM yields
EM 10Y benchmarks performance over US-T selloff periods, change in bp
27 39 52 56 62 74 74 86 100 103 129 136 151
181 189 196
244
282
356
-100
-50
0
50
100
150
200
250
300
350
400
RO
N
CLP
MY
R
ILS
CN
Y
IDR
INR
KR
W
TH
B
RU
B
US
D
HU
F
PLN
ZA
R
MX
N
PE
N
CO
P
BR
L
TR
Y
Taper tantrum (May/Sep 2013)
2015 selloff (Apr/June)
Since Nov4, 2016
Current real rates (policy rate deflated by 12M CPI) and J.P. Morgan for end-17;
%
6.1
3.9 3.2
2.3 2.2 2.2 2.1 1.7 1.5 1.5 1.3 1.3
0.9 0.8 0.7 0.4 0.3
0.0 -0.1
-2
-1
0
1
2
3
4
5
6
7
BR
L
RU
B
IDR
CN
Y
MX
N
RO
N
INR
PLN
MY
R
TH
B
CLP
CO
P
ZA
R
PE
N
PH
P
ILS
TR
Y
KR
W
HU
F
Real rates as of 21-Nov-16 JPM Fcst
GBI-EM index yield for EM, GBI index yield for DM
2
2.5
3
3.5
4
4.5
5
5.5
6
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
EM versus DM yields (%)
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Falling global risk premia—proxied by cross asset class implied volatility—is unlikely to
benefit EM rates broadly, but it is important for higher yielders
GBI-EM yields and US Term Premium; % Relationship between broad avg of EM rates and global risk
premia is weakening but it is still strong for higher beta markets
Source: J.P.Morgan, Haver
EM HY is geometric average of 10y swap rates for ZAR, TRY, MXN, BRL, COP,
INR, MYR
-1
-0.5
0
0.5
1
1.5
2
4.5
5
5.5
6
6.5
7
7.5
8
Oct
10
Mar
11
Aug
11
Jan
12
Jun
12
Nov
12
Apr 1
3
Sep
13
Feb
14
Jul 1
4
Dec
14
May
15
Oct
15
Mar
16
Aug
16
GBI-EM Global Div Yield (%)
NY Fed UST 5y Term Premium (right, %)
1
1.05
1.1
1.15
1.2
1.25
1.3
1.35
1.4
1.45
1.5
5.50
6.00
6.50
7.00
7.50
8.00
8.50
9.00
Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16
EM HY Geometric 10y rate
Cross Asset Implied Vol Index, right
Source: J.P.Morgan, Haver
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EM local market returns to be more modest in 2017, driven largely by carry
Note: Forecasted returns contingent on 2016 year-end forecasts being realized
Source: J.P. Morgan, YTD statistics as of Nov 21 COB
GBI-EM return forecasts; %
Total Returns Yield Levels Local Return Spot Levels Spot Return
Country 1H17F 2017F 2016F 1H17F 4Q17F 1H17F 2017F 2016F 1H17F 4Q17F 1H17F 2017F
GBI-EM Global Div 0.5% 6.0% 6.89% 6.95% 6.85% 3.1% 6.9% -2.5% -0.7%
South Africa 2.8% 13.9% 9.4% 9.3% 8.8% 5.3% 13.5% 14.75 15.1 14.7 -2.3% 0.3%
Romania 1.7% 12.5% 2.7% 2.85% 3.0% 0.8% 1.6% 4.33 4.3 3.9 0.9% 10.7%
Russia 2.1% 11.9% 8.6% 8.5% 8.2% 4.8% 10.2% 66.00 67.8 65.0 -2.6% 1.5%
Turkey 1.6% 8.3% 10.7% 10.5% 10.0% 6.0% 12.9% 3.50 3.7 3.7 -4.1% -4.1%
Colombia 4.3% 7.2% 7.5% 7.1% 6.9% 6.0% 10.6% 3150 3200 3250 -1.6% -3.1%
Hungary -0.5% 7.1% 2.4% 2.80% 2.90% -0.5% 0.3% 297.0 297.0 278.0 0.0% 6.8%
Brazil 3.5% 6.6% 11.4% 11.4% 10.9% 6.5% 12.9% 3.40 3.5 3.6 -2.9% -5.6%
Poland -0.3% 6.4% 2.9% 3.2% 3.3% 0.8% 1.3% 4.24 4.3 4.0 -1.2% 5.0%
Chile -0.8% 5.2% 4.3% 4.5% 4.7% 1.4% 2.9% 675 690 660 -2.2% 2.3%
Malaysia -1.5% 4.6% 4.4% 4.5% 4.4% 1.9% 4.6% 4.45 4.6 4.5 -3.3% 0.0%
Indonesia -1.9% 3.7% 8.1% 8.3% 8.3% 2.3% 6.7% 13800 14400 14200 -4.2% -2.8%
Peru -0.6% 1.7% 6.4% 6.8% 7.0% 0.3% 1.7% 3.42 3.5 3.4 -0.9% 0.0%
Philippines -2.7% 1.2% 5.5% 5.75% 5.85% 0.7% 2.7% 49.75 51.5 50.5 -3.4% -1.5%
Mexico -1.0% -0.8% 7.3% 7.6% 7.9% 2.1% 4.2% 20.75 21.4 21.8 -3.0% -4.8%
Thailand -3.3% -2.1% 2.4% 2.75% 3.0% -0.6% (0.8%) 35.75 36.8 36.3 -2.7% -1.4%
-10% -5% 0% 5% 10% 15%
2017 Carry and Duration 2017 Spot FX
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GBI-EM Model Portfolio: Hold a small duration UW through EM Asia in our GBI-EM
Model Portfolio, and stay UW FX across all three regions
Source: J.P. Morgan, YTD statistics as of Nov 21 COB
GBI-EM Model Portfolio and performance attribution
Weight Yield Duration
Bond
Position
FX
Position
Bond
View FX View USD Local FX Bonds FX Total
GBI-EM 100.00% 6.86% 4.86 -2.43% -2.20% UW UW 8.01% 8.10% -0.09% +40.2 -0.1 +40.1
EM Asia 26.72% 5.48% 5.61 -1.43% -0.70% UW UW 5.63% 5.19% 0.41% +15.5 -0.8 +14.7
EMEA EM 43.59% 7.06% 4.63 -1.00% -1.20% N UW 6.34% 7.24% -0.84% +4.9 +3.2 +8.1
Latin America 29.30% 8.13% 4.51 - -0.30% N UW 12.73% 12.30% 0.38% +19.8 -2.5 +17.3
Indonesia 10.00% 8.08% 6.37 - -0.40% N UW 15.77% 12.75% 2.68% +9.8 -1.6 +8.2
Malay sia 8.84% 4.43% 4.78 - - N N -1.79% 1.11% -2.86% +1.2 +1.3 +2.5
Philippines 0.41% 5.47% 7.28 -0.43% -0.30% UW UW -2.69% 3.07% -5.59% +3.8 +1.5 +5.3
Thailand 7.47% 2.41% 5.35 -1.00% - UW N 3.53% 1.82% 1.68% +0.7 -2.1 -1.4
Hungary 5.31% 2.37% 3.97 -2.25% -0.20% UW UW 4.23% 4.30% -0.06% +1.2 -4.2 -3.0
Poland 10.00% 2.93% 4.24 - -0.40% N UW -5.18% 0.28% -5.44% +0.3 -3.2 -2.9
Romania 3.11% 2.69% 3.97 - - N N 0.87% 2.91% -1.98% +1.4 +1.8 +3.2
Russia 5.63% 8.59% 3.73 - - N N 28.16% 12.16% 14.26% +3.3 +7.2 +10.5
Turkey 9.69% 10.67% 3.40 - -0.40% N UW -5.48% 9.02% -13.29% -0.2 +0.6 +0.5
South Africa 9.85% 9.38% 7.18 +1.25% -0.20% OW UW 23.81% 13.90% 8.70% -1.1 +1.0 -0.2
Brazil 10.00% 11.40% 2.94 +0.70% - OW N 49.41% 26.60% 18.02% +14.3 +2.7 +17.0
Chile 0.10% 4.28% 3.28 - -0.20% N UW 10.98% 5.80% 4.90% -0.2 -2.5 -2.7
Colombia 7.22% 7.52% 4.96 +0.30% -0.10% OW UW 12.37% 11.20% 1.05% +3.8 -1.2 +2.6
Mex ico 10.00% 7.31% 5.16 -1.00% - UW N -16.18% -0.39% -15.85% +2.5 +1.4 +4.0
Peru 1.98% 6.38% 7.54 - - N N 14.40% 14.52% -0.10% -0.6 -3.0 -3.6
GBI-EM GD Stats Model Portfolio GBI-EM GD Returns YTD MP Excess Returns YTD (bp)
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EM Asia: Stay UW FX and rates to start the year
EM Asia open rates trade recommendations EM Asia open FX trade recommendations
Source both charts: J.P.Morgan
Entry Date Entry Current
PNL
(bps)
Receive 10y KRW vs USD Spread 1/15/2016 -6 -34 28
Long INR 4y GovSec (8.27% IGB
2020) 2/5/2016 7.59 6.32 127
Receive 5y5y HKD vs USD Spread 8/8/2016 -9 -14 5
Pay SGD 1y IRS 9/8/2016 1.17 1.38 21
Long KRW 3y KTB futures 9/23/2016 1.31 1.81 -50
Pay TWD 2s5s NDIRS Curve 10/12/2016 15 42 27
Pay THB 2s5s NDIRS Curve 11/4/2016 29 43 14
Short SGD 10y SGS (SIGB 2.125
06/01/26) 11/14/2016 2.32 2.38 6
Pay CNY 2s5s ND-IRS 11/14/2016 31 31 0
Entry Date Entry Current
PNL
(%/pts)
Long EUR/CNH 5/9/2016 7.4250 7.3270 -1.32%
Long USD/CNH Spot 7/15/2016 6.6915 6.9103 3.27%
Pay USD/CNH 6m/12m DF Curve 9/23/2016 700 871 171
Long USD/KRW 3m NDF 10/14/2016 1135 1184 4.39%
Long 3M 6.80 – 6.90 USD/CNH
call spreads financed by selling 3M
6.72 USD/CNH calls 10/24/2016 0.24% 0.84% 0.60%
Long USD/TWD 3m NDF 11/14/2016 32.11 32.09 -0.06%
Long 3M 1140 – 1180 USD/KRW
call spread 11/14/2016 1.69% 1.86% 0.17%
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EMEA EM: Stay UW FX, MW local bonds
EMEA EM open rates trade recommendations EMEA EM open FX trade recommendations
Source both charts: J.P.Morgan
Outright
trades -
Rates
Entry Date Entry
level
Current
level Target Stop
TRY 1s5s
xccy flatteners 22-Nov-16 23bp 25bp -60bp
60bp
(review)
Receive 5y5y
ZAR IRS, pay
5y5y US IRS
07-Nov-16 665bp 660bp 580bp 715bp
PLN 2s5s IRS
steepeners 11-Oct-16 29bp 42bp 50bp 15bp
Outright trades
- FX
Entry
Date
Entry
Level
Current
level Target Stop
Long USD/PLN 22-Nov-
16 4.1604 4.1604 4.30 4.08
Long 3m
EUR/PLN 1x1
call spread
(4.45, 4.60),
spot reference:
4.4155
22-Nov-
16 0.85% 0.85% - -
Long 2m
USD/TRY 1x1
call spread
(3.45, 3.60),
spot reference:
3.3610
22-Nov-
16 1.05% 1.05% - -
Long 3m
EUR/ILS 1x1.5
put spread
(4.05, 3.90),
spot reference:
4.11
22-Nov-
16 0.58% 0.58% - -
Short 27-Nov-
17 EUR/CZK
forward (levels
reference fwds)
25-Nov-
15 26.6883 26.7741 26.00
27.25
(review)
35
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Latin America: UW FX and neutral duration heading into 2017
Source: Finance Ministries, J.P. Morgan
Latin America open FX trade recommendations Latin America open rates trade recommendations
A look at positioning suggests risks for Mexico bonds and
less so for Peru bonds
60
32 40
50
16 16
37
95 98
30
49
21 13
64
0
20
40
60
80
100
120
Mbonos TES Soberanos NTNF
Int. Inv. Holdings (% stock) PF holdings (% stock)
Last 5Y holdings percentile (int. Inv) Last 5Y holdings percentile (PF)
Source for both charts: J.P. Morgan, Bloomberg
Country Outright trades Entry
Date
Entry
level MtM
MX Buy Dec20 breakevens 8Sep15 3.13% 26bp
MX Pay 1y TIIE 20Oct16 5.44% 123bp
MX Switch into Jun26 Mbono from Nov42 Mbono 10Nov16 0.47 -18bp
BZ Receive DI Jan18 17Oct16 11.99% -40bp
BZ Buy LTN Jul20 paying 4Y NDF 21Jul16 326bp 32bp
BZ Switch into May21 NTNB from Jan21 NTNF 26Oct16 5.20 34bp
CL Enter 2s5s steepeners 7Apr16 36bp 22bp
CO Receive 3Y IBR 22Sep16 5.97% -27bp
CO Enter 2s10s IBR steepeners 28Mar16 84bp -2bp
CO Switch into Jul24 from Sep30 14Mar16 56bp -20bp
AR Buy Bocan17 floater (B+300) 26May16 35% -
AR Buy Feb17 Lete (USD local t-bill) 25Aug16 98.23 0.9%
AR Buy Sep18 nominal bond (new issue) 22Sep16 21.0% -148bp
AR Buy ARS local-law GDP warrant 18Oct16 10.30 1.9%
Recommendation Entry Date Entry Current level P+ L (%)*
Cash
Short USDARS 6m NDF 18-Nov-16 17.0 16.86 0.83
Long BRLCLP 4-Nov-16 200.5 201.7 1.07
Long 6m ARS/CLP NDF 31-Aug-16 41.96 41.90 -0.15
GBI EM MP
UW COP 5-Oct-16 2928.94 3163.47 7.04
UW CLP 7-Jul-16 665.95 676.87 0.46
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EM Hard Currency Strategy 37
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
Appendix 42
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EM hard currency spreads to continue trading wider, with forecast end-2017 levels
around 425bp for the EMBIGD and 400bp for the CEMBI, implying modest total returns
EMBIGD return scenarios for 2017 CEMBI Broad return scenarios for 2017
Source for both charts: J.P.Morgan
EMBIGD 10-year UST yield (%)
STW (bp) 1.80 2.05 2.30 2.55 2.80 3.05 3.30
300 13.6 11.9 10.3 8.6 7.0 5.3 3.7
325 12.0 10.3 8.7 7.0 5.4 3.7 2.1
350 10.4 8.7 7.1 5.4 3.8 2.1 0.5
375 8.8 7.1 5.5 3.8 2.2 0.5 -1.1
400 7.2 5.5 3.9 2.2 0.6 -1.1 -2.7
425 5.6 3.9 2.3 0.6 -1.0 -2.7 -4.3
450 4.0 2.3 0.7 -1.0 -2.6 -4.3 -5.9
475 2.4 0.7 -0.9 -2.6 -4.2 -5.9 -7.5
500 0.7 -0.9 -2.5 -4.2 -5.8 -7.5 -9.1
525 -0.9 -2.5 -4.2 -5.8 -7.4 -9.1 -10.7
550 -2.5 -4.1 -5.8 -7.4 -9.0 -10.7 -12.3
CEMBI Broad 7-year UST yield (%)
spread (bp) 1.75 2.00 2.25 2.50 2.75 3.00 1.75
275 11.4 10.2 9.1 7.9 6.8 5.6 275
300 10.1 9.0 7.8 6.7 5.5 4.4 300
325 8.9 7.8 6.6 5.5 4.3 3.2 325
350 7.8 6.6 5.4 4.3 3.1 2.0 350
375 6.6 5.4 4.3 3.1 2.0 0.8 375
400 5.5 4.3 3.1 2.0 0.8 -0.3 400
425 4.3 3.2 2.0 0.9 -0.3 -1.4 425
450 3.3 2.1 1.0 -0.2 -1.4 -2.5 450
475 2.2 1.0 -0.1 -1.3 -2.4 -3.6 475
500 1.2 0.0 -1.1 -2.3 -3.5 -4.6 500
525 0.2 -1.0 -2.2 -3.3 -4.5 -5.6 525
38
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Our long-term EMBIGD spread fair value model suggests that EMBIGD levels are
currently 60bp too rich, which could undergo correction
EMBIGD spread fair value model EMBIGD spreads have richened versus fair value over the
past three months…
…and are 1.5 standard deviations too rich, which could lead
to some more spread widening as this corrects
Dependent variable: EMBIGD spreads. Period: 60 quarterly observations from 1Q2001
to 4Q2015
Source for all charts: J.P. Morgan.
Variable Coefficient Std. Error t-Statistic p-val
Constant -486.225 78.327 -6.208 0.0000
EM GDP (%) -16.628 4.055 -4.100 0.0001
EM-DM GDP (%) -21.762 6.613 -3.291 0.0018
Government debt (% GDP) 14.800 1.970 7.513 0.0000
VIX 10.717 0.824 13.004 0.0000
2y UST (%) 41.000 9.647 4.250 0.0001
UST 2s30s (bp) 0.461 0.136 3.397 0.0013
R-Squared 94.85%
Standard error 39.305 150
250
350
450
550
650
750
850
02 03 04 05 06 07 08 09 10 11 12 13 14 15 16
Model Actual
-150
-100
-50
0
50
100
150
200
02 03 04 05 06 07 08 09 10 11 12 13 14 15 16
Residual +1 stderr
-1 stderr
EMBIGD spreads vs. model fit
Residual of EMBIGD spreads vs. model fit
39
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EMBIG Model Portfolio: Stay UW EMBIGD with UW LatAm versus OW CEE
Source: J.P. Morgan. Note: levels as of COB Nov 21, 2016
EMBIG Model Portfolio and performance attribution
Portfolio Returns YTD Portfolio Attribution YTD
Benchmark Return 8.24% Market position return (bp): 27
Portfolio Return 8.77% Credit selection return (bp): 26
Portfolio Outperformance (bp): 52 Portfolio Outperformance (bp): 52
As of November 21, 2016 Since Initiation YTD Changes & Returns
Credit selection
returns View
Current
Position Spread Duration
Initiation
Date
Spread Chg
vs EMBIG
Spread
Chg
Spread
Chg vs
EMBIG
Spread
Returns
Carry
Returns
Credit
Returns
(bp) (bp) (bp) (bp) (bp) (bp)
Argentina OW 1.00% 490 7.2 11-Feb-16 139 3 139 1 1 1
Croatia OW 0.40% 233 4.3 18-Nov-16 -2 0 -2 0 0 0
Dominican Republic OW 0.70% 396 7.8 18-Nov-16 -10 -8 -10 0 0 0
Ecuador OW 0.50% 751 4.1 8-Jul-16 -126 -148 -126 5 1 6
Kazakhstan OW 0.50% 239 9.6 8-Aug-16 -25 -16 -25 2 0 1
Panama OW 0.50% 183 8.3 8-Jul-16 12 -11 12 0 0 -1
Serbia OW 0.50% 263 3.3 18-Nov-16 -3 -1 -3 3 1 4
Bolivia UW -0.24% 86 5.5 20-Nov-15 -155 -164 -113 -4 0 -4
Colombia UW -1.50% 267 8.6 18-Nov-16 5 7 5 0 0 0
Mexico UW -1.30% 249 9.6 9-Nov-16 26 53 26 3 0 3
Mongolia UW -0.40% 733 3.5 30-Sep-16 48 69 48 3 -1 2
Pemex UW -1.30% 440 7.1 9-Nov-16 58 84 58 4 1 4
PLNIJ UW -0.25% 274 6.1 22-Nov-16 - - - - - -
South Africa UW -1.50% 250 7.2 8-Sep-16 3 30 3 0 0 0
Turkey UW -1.60% 367 7.2 5-May-16 112 68 112 6 0 6
Vietnam UW -0.40% 236 4.9 30-Sep-16 -12 8 -12 0 0 0
Closed position returns (bp): 2 Current Credit selection return (bp): 24
40
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EM corporates: Overall defensive, but selectively seeking carry buffer
Asia corporate segment recommendations Latam and CEEMEA corporate segment recommendations
Source for all charts: J.P.Morgan
Top Picks
Stable macro
stories Indian credits
Stable to improving Indian credits (Reliance '25s), Adani
Transmission ‘26s or SOEs with a reform story (Indian
Oil ‘23s, ONGC ‘23s)
China’s two-speed
economy
Consumption story Expect structural growth in consumption to remain intact;
we like Internet (Huawei ‘25s and ‘26s)
Strategically important SOEs
Stable SOEs (CNOOC '23s, ‘25s, CNPC '23s, CHGDNU
‘25s), infrastructure service providers (Beijing
Infrastructure ‘20s)
Lower part of the
capital structure of
strong credits
Structurally strong perps
Perps with high step-up (CCCC perps ‘c20s, RLCONS
‘c19s, CHALUM 6.25% ‘c17s CITLTD perps c’18s and
Sinochem ‘c18s)
Capital instruments from strong
banks
Select Korea and Singapore bank Basel 3 capital
instruments (Shinhan ‘26s, OCBC and UOB Tier 2, DBS
and Woori AT1)
Defensive sectors
Infrastructure Hutch ‘24s
Gas distribution Beijing Ent ‘21s, CR Gas ’22s, Chioil ’18s
Power plant Greenko '19s,
A few select HY
China HY property
China property developers with positive catalysts like
Greentown perps c19s
Short-dated bonds benefitting from strong technical
support: Central China ‘18s, Future Land ‘19s, Logan
’19s, Yuzhou ‘19s and Kaisa A ‘19s & B ‘20s.
Wide short dated bonds with
improved visibility on refinancing Parkson ‘18s, Vedanta 18s and 19s
Select India and Philippines HY Tata ‘20s
Top Pans
Downgrade
candidates China & Hong Kong credits
Lifestyle ‘25s, Swire ‘22s, Li & Fung ‘20s, Yuexiu ‘23s,
Wanda ‘18s & ‘24s
Overvalued bonds
Greater China property New World ‘22s and Perps, CIFI ‘20s, China South City
‘21s,Sunac ‘19s, Evergrande ‘20s
Greater China financials BNKEA AT1, HRAM ‘26s, Huishang AT1, , Cinda AT1
China LGFV
Weak HY LGFV Jiangsu New Headline ‘19s, longer-
tenor over-valued bonds Qingdao City Construction ‘20s
and ‘25s, Tianjin Binhai ‘20s
India credits Bharti ‘24s, ‘25s, Reliance ‘20s, NTPC ‘21s, 22s, RCOM
‘20s
Philippines credits First Pacific ‘23s, ICTSI 4.875% perps c24s
Indonesia HY
Lippo Karawaci '26s, Cikarang ‘26s, Tower Bersama
‘18s & ‘22s, Star Energy ’20s, Japfa ’18s and MPMX
‘18s
Top Picks
Select BB cement names Cemex ‘21s, ‘22s and ‘26s, Votorantim ‘24s, ‘27s and ‘41s
Select HY TMT Telcel ‘22s, Digicel curve (ex. DL 7.00% ‘20s)
Select Brazil bank seniors Banbra 3.875% ‘22s, Caixa ‘17s, ‘18s, ‘19s, ‘22s and Itau ‘18s
Select large cap bank sub-debt in Brazil,
Colombia, Mexico & Peru
Banbra AT1 9.25% & 9.0% Perps and Banbra T2 ‘22s and ‘23s, Caixa
T2 ‘24s, BanBog T2 ‘23s, ‘26s, BBVA Bancomer T1 '20s and T1
6.008% ‘22s, Banorte T2 ‘31s, Scotiabank T2 ‘27s, BINTPE T2 ‘29s
Select consumers Brazil beefs/poultry (Marfrig ‘20s, BRF ‘23s, ‘24s & ‘26s), Gruma ‘24s
and Ajecorp ‘22s
Select metals & mining and Pulp &
Paper
Curve plays in the belly and long-end of Vale (‘21s, ‘22s, ‘26s, ‘39s,
‘42s), Southern Copper ‘40s and Suzano ‘21s & ‘26s
O&G Quasis Plays in the belly of Petrobras’ USD curve ('20s, '21Ns, '21Os, '23s,
'24s and '26s) as well as in the EUR curve (2.75% '18s, 4.875% '18s,
5.875% ‘22s & 4.25% '23s). YPF ‘21s & ‘24s
Argentine Provinces Province of Buenos Aires ‘24s
Tactical trades in long-end of select
Mexican names
Bimbo ‘44s, America Movil ‘42s, Televisa ‘45s
Top Pans
Select short-end Oil & Gas Quasis Ecopetrol ‘18s & ‘19s, Pemex ‘18s & ‘19s
Select short-end/belly TMT in Mexico
and Colombia
America Movil ’17s, ‘19s, ‘20s & ‘22s, Telmex ‘19s, Coltel ‘22s,
Millicom ‘20s
Select short tenor of senior Andean
banks
Banco Estado’s curve, Corpbanca ‘18s & ‘19s, Santander Chile ‘22s,
Cofide ‘19s, BBVA Continental ‘17s & ‘18s, Davivienda ‘18s, BanBog
‘17s, BCP ‘18s,’19s, ‘23s
Select financials in Peru & Brazil BBVA Continental T2 ‘29s, Itau T2 ‘21s & ‘23s, Santander Brazil ‘17s,
Banbra ‘20s, BTG Pactual curve
Brazil distress situations Odebrecht curve (‘25s, ‘29s, ‘42s & Perps)
Select metal & mining and pulp & paper Gerdau '20s, Arauco ‘19s, CMPC '18s & '19s, select Southern Copper
‘20s, ‘22s & ‘25s
Top Picks - CEEMEA Turning a corner Petra Diamonds '21s, MTN '24s
High yield with stable or improving credit
profiles
DAMAC '19s, Global Ports '21s, Oschadbank '23s '25s
Alpha or event plays FBN '21s, Access '21s, Dana Gas '17s, MAF perps
Short duration IG Aldar '18s, Tupras '18s, Israel Electric '19s
Dislocation, based on technicals not
fundamentals
Is Bank '19s, '20s, '21s, Halk Bank '19s, '20s, '21s, Ziraat '19s, '21s,
Anadolu Efes '21s, Sisecam '20s, Koc Holding '23s, Turk Telekom '24s
Cheap to sovereign or direct
comparable
Sberbank '22s, '23s, Aabar '20s, and '22s, Transnet '22s, TIAMK '22s
Top Pans Deteriorating profile Emirates Air '23s and '25s, Dar al Arkan curve, VEB curve
Spread not commensurate with credit
risk
Delek & Avner '23s and '25s
Tight spread GCC paper DEWA curve, IPIC curve, Mubadala curve, Taqa curve, QTEL curve,
QNB curve, NBAD curve, CBQ curve, Al Hilal perp, DP World '20s,
KIPCO '19s and '20s, Burgan '21s
41
Agenda
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42
Appendix
42
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
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Growth and Inflation Outlook and Forecasts
Source: J.P. Morgan. *Includes only inflation targeters
Real GDP Real GDP Inflation Inflation
%oya 2017 %q/q saar % Dec/Dec 2017 %oya
2016 2017 2018 1Q 2Q 3Q 4Q 2016 2017 2018 1Q 2Q 3Q 4Q
Developed markets 1.6 1.8 1.6 1.8 1.7 1.7 1.6 1.3 1.8 2.0 1.9 1.9 2.0 1.9
Emerging Markets 3.8 4.2 4.5 4.1 4.3 4.7 4.5 3.5 3.6 3.7 3.3 3.2 3.3 3.4
EM Asia 5.9 5.6 5.6 5.4 5.6 5.9 5.6 2.2 2.7 3.4 2.3 2.4 2.7 2.7
EMEA EM 1.4 1.9 2.7 2.1 2.3 2.8 2.7 6.0 5.7 4.2 4.7 4.6 4.4 4.7
Latin America* -0.6 1.7 2.6 1.9 1.9 2.3 2.4 5.2 4.3 3.8 4.8 4.4 4.2 4.3
EM Asia 5.9 5.6 5.6 5.4 5.6 5.9 5.6 2.2 2.7 3.4 2.3 2.4 2.7 2.7
China 6.7 6.4 6.2 6.1 6.3 6.8 6.3 2.1 2.4 3.5 2.2 2.1 2.4 2.4
Hong Kong 1.6 1.8 2.0 0.8 1.4 2.0 2.0 2.3 3.6 2.4 1.5 2.2 2.5 3.6
India 7.2 7.0 7.4 7.0 6.9 7.0 7.2 4.2 4.5 5.4 4.2 4.5 4.7 5.0
Indonesia 5.0 5.1 5.3 5.5 5.3 5.0 5.0 2.9 3.4 3.0 2.7 2.8 3.4 3.5
Korea 2.8 2.3 2.5 2.0 2.8 2.8 2.5 1.3 1.9 2.1 1.7 1.9 2.3 1.9
Malaysia 4.1 4.1 3.9 4.0 3.5 4.5 5.0 1.3 2.4 2.4 2.5 2.3 2.4 2.4
Philippines 6.8 6.0 5.8 5.3 6.1 6.6 6.6 2.4 3.4 3.1 3.0 3.4 3.8 3.9
Singapore 1.0 0.8 2.4 1.8 2.0 2.0 2.0 0.4 1.3 1.4 0.9 1.1 1.3 1.3
Taiwan 1.2 2.1 1.9 1.8 1.8 1.8 1.8 1.2 1.7 1.8 0.7 1.0 1.5 1.2
Thailand 3.0 2.0 2.9 2.6 2.6 2.6 2.6 0.7 2.0 1.8 1.1 1.3 1.8 2.0
Latin America -0.6 1.7 2.6 1.9 1.9 2.3 2.4 10.0 6.7 5.3 8.7 6.8 6.5 6.7
Argentina -2.1 3.2 3.3 6.0 4.0 4.0 3.5 39.7 21.2 14.5 33.2 21.6 20.5 21.1
Brazil -3.2 0.8 2.2 0.8 1.2 1.9 1.8 6.8 4.8 4.5 5.9 5.1 4.6 4.9
Chile 1.8 2.3 2.9 3.0 2.5 2.7 3.0 2.8 3.2 3.2 2.3 2.3 2.7 3.2
Colombia 1.7 2.2 3.3 2.0 2.0 3.5 3.5 5.8 3.9 3.8 5.0 4.0 3.5 3.9
Ecuador -1.8 0.4 1.7 2.5 -2.0 -5.0 -2.0 1.1 2.8 2.8 1.5 1.9 2.2 2.8
Mexico 2.2 1.8 2.4 0.7 1.8 2.0 2.2 3.4 4.0 3.1 3.7 4.1 4.2 3.9
Peru 4.0 4.5 4.2 4.5 4.0 4.5 4.8 2.8 2.3 2.1 2.6 2.5 2.4 2.3
Uruguay 0.5 1.2 3.1 1.0 2.0 2.3 2.5 8.7 8.5 7.0 8.0 8.2 8.4 8.5
Venezuela -11.0 -1.5 2.5 -1.0 2.0 2.0 3.0 900.0 650.0 180.0 1052.0 1167.1 973.1 751.3
EMEA EM 1.4 1.9 2.7 2.1 2.3 2.8 2.7 6.0 5.7 4.2 4.7 4.6 4.4 4.7
Croatia 2.5 2.4 2.1 — — — — -0.4 1.5 1.3 0.4 1.3 1.6 1.5
Czech Republic 2.6 2.5 2.6 1.4 1.9 2.7 2.4 1.6 2.0 1.7 1.5 1.6 1.7 1.9
Egypt 3.2 2.6 4.5 — — — — 18.6 22.6 12.4 — — — —
GCC 1.6 1.3 3.1 — — — — 2.5 3.2 3.4 — — — —
Hungary 2.0 2.5 2.6 2.0 2.0 2.5 2.5 1.5 2.5 2.3 2.1 2.5 2.5 2.4
Israel 3.2 3.0 3.2 2.4 3.2 3.6 4.5 0.1 1.3 2.1 0.4 0.6 0.0 1.1
Kazakhstan 0.6 2.5 3.0 — — — — 7.6 8.5 7.0 7.0 6.8 7.1 8.2
Nigeria -1.1 1.0 2.5 — — — — 18.3 10.7 — — — — —
Poland 2.7 3.0 3.1 3.1 3.0 3.0 3.0 0.5 1.3 1.9 1.3 1.4 1.4 1.3
Romania 4.9 3.5 2.9 4.1 2.8 2.8 3.2 -0.3 2.6 3.2 0.9 1.6 2.3 2.5
Russia -0.6 1.1 1.6 1.0 1.5 1.8 2.0 5.7 4.6 4.4 5.4 5.0 4.9 4.8
Serbia 2.6 2.9 3.1 — — — — 2.2 3.6 — — — — —
South Africa 0.4 1.0 1.5 1.0 0.0 2.0 0.8 6.4 5.1 5.2 5.8 5.2 5.2 5.1
Turkey 2.8 2.8 3.2 3.6 4.1 4.5 4.1 7.8 8.2 6.7 8.0 8.3 7.4 8.4
Ukraine 1.7 3.6 3.5 — — — — 11.2 8.5 6.6 11.7 9.9 10.9 9.0
43
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EM monetary policy forecasts
Current End of Period Forecast (%pa)
(%pa) Next change 1Q17 2Q17 3Q17 4Q17
Developed 0.30 0.40 0.51 0.51 0.62
Emerging 5.13 5.04 4.83 4.80 4.81
EM Asia 4.08 4.03 3.84 3.84 3.85
China 4.35 2Q 17 (-25bp) 4.35 4.10 4.10 4.10
Hong Kong 0.75 Dec 16 (+25bp) 1.00 1.25 1.25 1.50
India 6.25 Dec 16 (-25bp) 6.00 5.75 5.75 5.75
Indonesia 4.75 On hold 4.75 4.75 4.75 4.75
Korea 1.25 1Q 17 (-25bp) 1.00 1.00 1.00 1.00
Malaysia 3.00 On hold 3.00 3.00 3.00 3.00
Philippines 3.00 On hold 3.00 3.00 3.00 3.00
Taiwan 1.38 On hold 1.38 1.38 1.38 1.38
Thailand 1.50 On hold 1.50 1.50 1.50 1.50
EMEA EM 5.76 5.92 5.92 5.93 5.93
Czech Republic 0.05 1Q 18 (+20bp) 0.05 0.05 0.05 0.05
Hungary 0.90 On hold 0.90 0.90 0.90 0.90
Israel 0.10 4Q 17 (+15bp) 0.10 0.10 0.25 0.25
Nigeria 14.00 On hold 15.00 15.00 15.00 15.00
Poland 1.50 On hold 1.50 1.50 1.50 1.50
Romania 1.75 Feb 2018 (+25bp) 1.75 1.75 1.75 1.75
Russia 10.00 Jun 17 (-50bp) 10.00 9.50 9.00 8.50
South Africa 7.00 On hold 7.00 7.00 7.00 7.00
Turkey* 7.79 Jan 18 (-25bp) 7.75 7.75 7.75 7.75
LatAm 9.54 8.99 8.52 8.28 8.36
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
Peru 4.25 On hold 4.25 4.25 4.25 4.25
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
44
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Exchange rate end-of-period forecasts versus US dollar
*Refers to DICOM rate, formerly SIMADI
Source: J.P. Morgan
versus USD Dec 16 Mar 17 Jun 17 Sep 17 Dec 17 Forwards Dec 16 Mar 17 Jun 17 Sep 17 Dec 17
EUR 1.08 1.04 1.06 1.08 1.15 EUR 1.07 1.07 1.08 1.08 1.08
JPY 109 106 103 100 97 JPY 110.75 110.18 109.47 108.72 108.07
GBP 1.24 1.21 1.19 1.20 1.26 GBP 1.25 1.25 1.25 1.25 1.25
AUD 0.75 0.73 0.71 0.71 0.73 AUD 0.75 0.74 0.74 0.74 0.74
CAD 1.36 1.38 1.43 1.43 1.43 CAD 1.34 1.34 1.33 1.33 1.33
NZD 0.70 0.68 0.66 0.64 0.64 NZD 0.71 0.70 0.70 0.70 0.69
CHF 0.99 1.01 0.99 0.96 0.90 CHF 1.01 1.00 0.99 0.98 0.98
NOK 8.33 8.56 8.30 8.06 7.48 NOK 8.50 8.49 8.47 8.44 8.43
SEK 9.26 9.52 9.29 9.03 8.39 SEK 9.19 9.14 9.08 9.01 8.96
EMEA EM Dec 16 Mar 17 Jun 17 Sep 17 Dec 17 EMEA EM Dec 16 Mar 17 Jun 17 Sep 17 Dec 17
ILS 3.85 3.85 3.75 3.70 3.65 ILS 3.87 3.85 3.83 3.81 3.80
CZK 25.73 25.98 25.49 25.02 22.61 CZK 25.41 25.22 24.99 24.75 24.54
PLN 4.24 4.33 4.29 4.26 4.04 PLN 4.17 4.17 4.17 4.16 4.16
HUF 297 303 297 294 278 HUF 290.92 290.20 288.98 287.76 286.88
RON 4.33 4.38 4.29 4.17 3.91 RON 4.24 4.24 4.22 4.21 4.20
RUB 66.00 67.00 66.50 66.00 65.00 RUB 65.06 66.42 67.53 68.67 69.90
TRY 3.50 3.65 3.65 3.65 3.65 TRY 3.38 3.45 3.51 3.59 3.66
ZAR 14.75 15.25 15.10 14.85 14.70 ZAR 14.38 14.63 14.86 15.08 15.33
Latin America Dec 16 Mar 17 Jun 17 Sep 17 Dec 17 Latin America Dec 16 Mar 17 Jun 17 Sep 17 Dec 17
ARS 15.40 15.90 16.25 16.80 17.70 ARS 16.01 16.83 17.62 18.33 19.13
BRL 3.40 3.45 3.50 3.55 3.60 BRL 3.39 3.48 3.55 3.61 3.68
CLP 675.00 680.00 690.00 675.00 660.00 CLP 676.26 680.72 684.39 687.89 691.99
COP 3150 3200 3200 3250 3250 COP 3180.09 3216.78 3254.69 3291.87 3332.98
MXN 20.75 21.25 21.40 21.60 21.80 MXN 20.49 20.73 20.94 21.17 21.42
PEN 3.42 3.44 3.45 3.44 3.42 PEN 3.44 3.47 3.50 3.53 3.56
VEF* 700.00 750.00 825.00 3000.00 5000.00 VEF* - - - - -
UYU 30.00 30.25 30.50 30.80 31.00 UYU - - - - -
EM Asia Dec 16 Mar 17 Jun 17 Sep 17 Dec 17 EM Asia Dec 16 Mar 17 Jun 17 Sep 17 Dec 17
CNY 6.9 7.05 7.2 7.15 7.10 CNY 6.90 6.96 6.99 7.02 7.05
HKD 7.77 7.79 7.81 7.76 7.75 HKD 7.75 7.75 7.73 7.72 7.71
INR 69.00 70.25 71.5 71.25 71.00 INR 68.53 69.24 69.85 70.49 71.20
IDR 13800 14000 14400 14200 14200 IDR 13579.09 13866.96 14083.35 14293.47 14529.84
KRW 1185 1230 1200 1180 1210.00 KRW 1186.81 1186.05 1182.39 1177.81 1174.59
MYR 4.45 4.5 4.6 4.5 4.45 MYR 4.46 4.49 4.51 4.52 4.54
PHP 49.75 51 51.5 51 50.50 PHP 49.61 49.71 49.74 49.73 49.77
SGD 1.43 1.47 1.48 1.46 1.45 SGD 1.43 1.43 1.42 1.42 1.42
THB 35.75 36.5 36.75 36.25 36.25 THB 35.53 35.56 35.54 35.53 35.55
TWD 32.00 32.5 33 33.25 33.00 TWD 31.95 31.85 31.69 31.53 31.40
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EM Asia sovereign issuance forecast
Source: J.P. Morgan
US$mn
2016 Gross Issuance Forecast
2017 Gross Issuance Forecast YoY Change
2017 Coupons
2017 Amortizations
2017 Total Cashflows
Bangladesh - - - - - - China - - - 17 - 17 Fiji - - - 13 - 13 Hong Kong - - - 19 - 19 Indonesia 5,920 11,000 5,080 2,563 1,000 3,563 India - - - - - - Malaysia 1,500 - (1,500) 104 - 104 Mongolia 500 1,000 500 126 - 126 Pakistan 1,000 1,000 - 368 750 1,118 Papua New Guinea - - - - - - Philippines 855 3,000 2,145 1,547 523 2,070 South Korea - 500 500 243 - 243 Sri Lanka 1,500 1,000 (500) 509 - 509 Thailand - - - - - - Vietnam - 1,000 1,000 116 - 116 EM Asia 11,275 18,500 7,225 5,625 2,273 7,898
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Latin America sovereign issuance forecast
Source: J.P. Morgan
US$mn
2016 Gross Issuance Forecast
2017 Gross Issuance Forecast YoY Change
2017 Coupons
2017 Amortizations
2017 Total Cashflows
Argentina 22,000 8,000 (14,000) 2,732 7,805 10,537
Aruba - - - 12 - 12
Bahamas - - - 58 - 58
Barbados - - - 42 - 42
Belize - - - 46 - 46
Bermuda - - - 36 - 36
Bolivia - 500 500 54 - 54
Brazil 3,000 4,000 1,000 2,543 247 2,790
Chile 2,040 2,500 460 217 - 217
Colombia 1,520 3,000 1,480 1,390 1,650 3,040
Costa Rica - - - 259 - 259
Dominican Republic 1,500 1,200 (300) 672 251 923
Ecuador 2,000 2,000 - 567 - 567
El Salvador 550 650 100 408 - 408
Guatemala 700 700 - 133 - 133
Honduras - - - 81 - 81
Jamaica (42) 500 542 399 175 574
Mexico 9,863 3,000 (6,863) 3,049 4,409 7,459
Panama 1,000 1,000 - 669 - 669
Paraguay 600 600 - 163 - 163
Peru 1,102 - (1,102) 889 - 889
Suriname 550 - (550) 51 - 51
Trinidad & Tobago 1,000 - (1,000) 102 - 102
Uruguay 1,147 2,050 903 757 500 1,257
Venezuela - - - 3,032 - 3,032
Latin America 48,529 29,700 (18,829) 18,363 15,036 33,399
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EMEA EM sovereign issuance forecast
Source: J.P. Morgan
US$mn 2016 Gross
Issuance Forecast
2017 Gross
Issuance Forecast YoY Change 2017 Coupons 2017 Amortizations
2017 Total
Cashflows
Albania - - - 28 - 28
Angola - - - 213 250 463
Armenia - - - 66 - 66
Azerbaijan - 1,000 1,000 59 - 59
Bahrain 2,600 1,500 -1,100 580 - 580
Belarus - 800 800 72 - 72
Bulgaria 2,244 1,000 -1,244 223 1,016 1,240
Cameroon - 500 500 71 - 71
Congo - - - 21 26 47
Cote d'Ivoire - - - 104 - 104
Croatia - 1,650 1,650 730 1,500 2,230
Czech Republic - - - 381 - 381
Egypt - 3,000 3,000 180 - 180
Ethiopia - - - 66 - 66
Gabon - - - 144 161 305
Georgia - - - 34 - 34
Ghana 419 - -419 354 199 553
Hungary 155 1,500 1,345 1,123 1,921 3,044
Iraq - 1,000 1,000 157 - 157
Israel 1,500 - -1,500 355 - 355
Jordan 1,000 500 -500 105 - 105
Kazakhstan - - - 333 - 333
Kenya - 1,000 1,000 182 - 182
Kuwait - 10,000 10,000 - - -
Latvia 1,470 1,000 -470 142 1,000 1,142
Lebanon 1,000 2,500 1,500 1,138 2,511 3,649
48
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EMEA EM sovereign issuance forecast (cont.)
Source: J.P. Morgan
US$mn 2016 Gross
Issuance Forecast
2017 Gross
Issuance Forecast YoY Change 2017 Coupons 2017 Amortizations
2017 Total
Cashflows
Lithuania 506 750 244 512 750 1,262
Macedonia 496 - -496 62 - 62
Montenegro 329 - -329 55 - 55
Morocco - 1,000 1,000 219 535 754
Mozambique - - - - - -
Namibia - - - 67 - 67
Nigeria - 2,000 2,000 91 - 91
Oman 4,000 1,500 -2,500 162 - 162
Poland 5,872 5,000 -872 1,992 2,489 4,481
Qatar 9,000 - -9,000 972 2,000 2,972
Romania 3,621 2,750 -871 845 - 845
Russia 3,000 3,000 - 2,695 3,648 6,343
Rwanda - - - 27 - 27
Saudi Arabia 17,500 5,000 -12,500 602 - 602
Senegal - 500 500 75 - 75
Serbia - - - 329 100 429
Slovakia - 1,000 1,000 177 1,070 1,246
South Africa 3,617 2,000 -1,617 813 500 1,313
Tanzania - - - 39 - 39
Tunisia - 750 750 66 - 66
Turkey 5,500 6,000 500 3,296 3,855 7,151
Ukraine 316 1,000 684 964 - 964
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
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Disclosures
Disclosures
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Overweight Marketweight Underweight
Global Sovereign Research Universe 18% 62% 20% IB clients* 50% 43% 56%
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