The Emerging Markets Weekly：Stabilization mode

Emerging Markets Research 10 July 2014 PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES STARTING AFTER PAGE 40 The Emerging Markets Weekly Stabilization mode • Concerns about Portuguese bank Espirito Santo have caused some market jitters, with some spillover effects into parts of EM. EM-specific developments have been broadly market-neutral or supportive, however. China’s CPI was modestly below market consensus, strengthening the case for interest rate cuts later this year. In Indonesia, quick-count polls suggest that Joko Widodo has secured a victory in the presidential elections and if the final vote count confirms these results, we think that Indonesian markets will likely strengthen further. India’s budget may have been perceived as marginally underwhelming by investors, but we expect that details on the reform agenda will slowly come through, supporting markets. • While we do expect market volatility to increase later in H2, we think that the global market environment may remain relatively favorable for EM over the summer. If and when volatility picks up, we think that EM should be much better positioned than last year to weather any potential turbulence, with macro fundamentals and a shift of the EM investor base to more sticky institutional investors providing an anchor. • Against this backdrop, we think that it makes sense to keep carry trades. Granted, carry is less at an index level than in Q1, but there are still pockets where carry is generous and positioning technicals are not a source of vulnerability yet. EM sovereign and corporate credit Overview: Carrying on 2 We think that EM credit seems relatively resilient to weather any potential rise in market volatility from a fundamental and a technical perspective. In focus this week: We lift Indonesia credit to overweight and suggest extending duration in Peru, Morocco, and Vale. Pemex screens as expensive: we recommend selling or switching into peers such as Ecopetrol or Gazprom Neft. EM FX/local markets Overview: Medium risk but high carry 8 Rate hikes and weakness in H2 13 have created pockets of attractive risk premia and carry. Investors do not need to take a lot of fundamental risk to get this carry. In focus this week: We reiterated our recommendation to position for an Mbono flattener (between 2024 and 2042) and to sell EUR/BRL. Also, in IndoGBs we recommend moving to an overweight-cash, neutral-duration allocation. Macro outlooks/data review & preview Emerging Asia: Jokowi wins the ‘quick count’ 18 EEMENA: Turkey to continue cutting 22 Sub-Saharan Africa: Monetary policy in focus 26 Latin America: Elementary, my dear – Rates follow CPI trends 29 Commodities outlook and political heat map Commodities: Precious metals: The gears are churning 32 Politics: Jokowi wins on quick count 34 EM Credit Overview 2 In focus this week 4 Weekly chart pack 6 Credit portfolio 7 EM FX/Local Overview 8 In focus this week 11 Weekly chart pack 14 EM FX views on a page 16 FX Forecasts and Forwards 36 Official Interest Rates 37 EM Dashboard 38 Weekly EM Asset Performance Note: EM FX, Rates charts as of 10 July 2014. EM Credit charts as of 9 July 2014 and data based on Barclays Global EM Sovereigns and Corp + Quasi-Sov. USD indexes. EM rates are 5y generic government bonds in local currency. Positive movement in EM FX chart represents EM currency appreciation against USD. Source: Bloomberg, Barclays Research 7 bp8 bp5 bp-5 bp8 bp0 bp13 bp4 bp-125 bp-25 bp104118137190192196203203626866MexicoPhilippinesBrazilIndonesiaS.AfricaRussiaHungaryTurkeyArgentinaVenezuelaEM Credit index OASOne-weekchangeCurrent(bp)-1 bp2 bp3 bp4 bp-4 bp-5 bp-2 bp2 bp-8 bp-4 bp88132174197221253296309336352South KoreaUAEChileMexicoIndiaChinaTurkeyBrazilRussiaIndonesiaEM Corp index OASOne-weekchangeCurrent(bp)2 bp-8 bp1 bp-3 bp-1 bp-6 bp14 bp8 bp9 bp0 bp2.822.963.704.447.787.798.378.608.6611.73KoreaPolandMalaysiaMexicoIndonesiaS.AfricaRussiaTurkeyIndiaBrazilEM 5y RatesOne-weekchangeCurrent(%)-0.8%-0.8%-0.5%-0.5%-0.3%-0.1%0.2%0.4%0.8%60.215531,0132.2212.9929.932.1210.7033.98INR/USDCLP/USDKRW/USDBRL/USDMXN/USDTWD/USDTRY/USDZAR/USDRUB/USDEM FXOne-weekchangeCurrent Barclays | The Emerging Markets Weekly 10 July 2014 2 EM SOVEREIGN AND CORPORATE CREDIT: OVERVIEW Carrying on Despite some recent crosswinds, the low volatility environment should continue to favour carry trades over the summer. We believe the global environment will become more challenging later in H2, but that EM credit seems relatively resilient to weather any potential rise in US Treasury yields and market volatility – both from a fundamental and a technical perspective. Following the presidential electi