January 20, 2017

Trending Insights

“Reflationary trade” seems overcrowded; may see unwinding, helping EMs…

Research Analyst
Azeem Ahmad azeem.ahmad@icicisecurities.com
@
Reflation trade: Has been driver since presidential election...
Since the presidential election verdict on November 8, 8 2016,
2016 fund flows have strongly targeted US.
US To describe this,
this
many have used the term “reflation trade”. The reflation trade is built on hopes of strong US growth coupled with
higher inflation as the new establishment hinted at a tax cut and fiscal stimulus plans.

Strong
Dollar

Strong US Reflation Weakness

Equity Trade in US Bonds

Weakness
in EMs and
risk assets

Risk assets including EMs have seen a strong sell-off from their equity and debt segment since the beginning of
reflation trade. The money has moved into US equities and dollar denominated assets.

Source: Bloomberg, ICICIdirect.com Research

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CFTC data suggests: Reflation trade currently most crowded trade …
Key components of reflation trade highly crowded US 10
10-year
year treasury: Shorts at highest level on record
600000
• Key components of reflation trade include long

CFTC CBT 10‐Yr US TTreasury Notes 
500000

Net Non‐Commerrcial Futures 
US equity & US dollar and sell US bond and 400000
Emerging markets 300000
200000
•As p
per the latest CFTC data,, bullish bets on the S&P 100000
500 and dollar have started to wane out a little. The 0
net short in US bond markets are still at record highs ‐100000 Inflation improving towards fed
• These are the most crowded trade among market ‐200000 mandated 2% level
participants and are vulnerable for some reversal, if ‐300000
‐400000
the US President under-delivers on January 20 ‐500000
500000

Dec‐92
Dec‐93
Dec‐94
Dec‐95
Dec‐96
Dec‐97
Dec‐98
Dec‐99
Dec‐00
Dec‐01
Dec‐02
Dec‐03
Dec‐04
Dec‐05
Dec‐06
Dec‐07
Dec‐08
Dec‐09
Dec‐10
Dec‐11
Dec‐12
Dec‐13
Dec‐14
Dec‐15
Dec‐16
Dollar Index : Bullish bets halt as $ surge tapers in pace S&P 500 speculative longs have started to wane down
25000
100000

Non‐
ons
US Dollar Index Net Non‐

20000

mmercial Futures Positio
P 500 Stock Index Net N
80000
15000
Commercial Fut 

60000 10000
5000
40000
0
20000
CFTCU

Com
S&P
‐5000
5000
0 ‐10000

‐20000 ‐15000

Jul‐12

Jul‐13

Jul‐14

Jul‐15

Jul‐16
Apr‐12

Apr‐13

Apr‐14

Apr‐15

Apr‐16
Jan‐12

Jan‐13

Jan‐14

Jan‐15

Jan‐16
Oct‐11

Oct‐12

Oct‐13

Oct‐14

Oct‐15

Oct‐16
Dec‐14

Dec‐15

Dec‐16
Jun‐14

Jun‐15

Jun‐16
Aug‐14
Oct‐14

Aug‐15
Oct‐15

Aug‐16
Oct‐16
Feb‐14
Apr‐14

Feb‐15
Apr‐15

Feb‐16
Apr‐16

J
January 20 speechh may trigger
i some sharp
h positional
i i l changes
h iin current reflation
fl i trade
d andd may trigger
i higher
hi h volatility.
l ili
Source: Bloomberg, ICICIdirect.com Research CFTFC :Commodity Futures Trading Commission

3
Equity move post US-Presidential election has strongly been US centric...

Up move only seen in US: Previous rallies have seen world markets advance but not since election

30
S&P 500 MSCI World MSCI Asia MSCI EM MSCI LatAm Nifty
25

20

15
% c hange

10

‐5

10
‐10

‐15
Greece Debt   European  Rate hike  Chinese Yuan  Commodity  Post Brexit  Election to 
cirses (Nov  Debt Crises  expectations  Devalution  Carnage (Feb  (June 16) 2016 End
11) (Nov 12) (Oct 14) (Aug 15) 16)

The main cause for this trend has been trade positioning (as explained in last slide) and also the fact that the
expectation on tax cut and fiscal stimulus has reinvigorated the strong US corporate growth story.

Source: Bloomberg, ICICIdirect.com Research Note : % returns calculated post the event based decline abates.

4
Emerging market outflows taper; lofty valuations quelled, making EMs attractive…
MSCI EM ETF : Short OI reduces but inflows still missing
missing... After seeing almost 20% outflow EM bond ETF stabilises...
stabilises
160 Fund Flow Short Interest 3000
124 Emerging Market Bond ETF (L)

d Flow (in Mlns)
600
Short Open Interestt (in Millions)

150 2500
Estimated Money Flow(R) (in US $ mln)

Emerging Markett Bond Price
Fund Flows (In US $ million)
2000 121 500
140 Cumulative Money Flow (R) (in US $ 10 mlns)
1500 118 400
130
1000 300
120 115

Emerging Market Bond
500 200
110 112
0
100 100
‐500 109
90 0
‐1000
80 106 ‐100
‐1500
70 ‐2000 103 ‐200
60 ‐2500 100 ‐300
Dec‐15
5

Dec‐16
6
Jun‐16
6

Aug‐16
6
Oct‐15
5

Oct‐16
6
May‐16
6
Nov‐15
5

Nov‐16
6
6
Feb‐16

Apr‐16
6

Jul‐16
6
Sep‐15
5

Sep‐16
6
Mar‐16
6
Jan‐16

Jan‐17

Feb‐12

Feb‐13

Feb‐14

Feb‐15

Feb‐16
Aug‐11

Aug‐12

Aug‐13

Aug‐14

Aug‐15

Aug‐16
May‐12

May‐13

May‐14

May‐15

May‐16
Nov‐11

Nov‐12

Nov‐13

Nov‐14

Nov‐15

Nov‐16
EM equity valuation dropping to average: suggesting Surge in G7 bond yields have made EM bonds less attractive
overoptimism is missing till the time current inflationary set up continues....
18 Relative Valuation 90 Bloomberg USD Emerging Market Sovereign Bond Index (L)
g g
MSCI Emerging Markets Index 6 13

7 
Bl
Bloomberg G7 Developed Sovereign Bond Index (L)
b G7 D l dS i B d I d (L)

Multiple of EM Yields Over G7
16 MSCI World Index 12
85 5 Multiple of EM Yields Over G7 Yields (R)
11
elative Valuation
P/E Valuation

14 4 10

Bond Yield
80

Yields 
9
12 3
8
75
10 2 7
Re

6
70 1
8 5
0 4
6 65

Dec‐16
Dec‐16
Jun‐16
Jun‐16

Aug‐16
Aug‐16

Oct‐16
May‐16
May‐16

Nov‐16
Nov‐16
Jul‐16
Jul‐16
Feb‐16
Feb‐16

Apr‐16
Apr‐16

Sep‐16
Sep‐16
Mar‐16
Mar‐16
Jan‐16

Jan‐17
Oct‐12

Oct‐13

Oct‐14

Oct‐15

Oct‐16
Apr‐12
Jul‐12

Apr‐13
Jul‐13

Apr‐14
Jul‐14

Apr‐15
Jul‐15

Apr‐16
Jul‐16
Jan‐12

Jan‐13

Jan‐14

Jan‐15

Jan‐16

Money flow & valuation data suggests EMs (selective EMs) are still near attractive levels and could attract money flows in near term
Source: Bloomberg, ICICIdirect.com Research

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Last two decades data suggests commodity based EMs have given superior
returns (nine out of 10 equity gauges are from developing nations)…
Top 10 stock market returns (in US $ terms): EMs dominate post positions
1st 2nd 3rd 4th 5th 6th 7th 8th 9th 10th
1997 Oman Turkey Russia  Botswana Hungary Mexico Switzerland Portugal Greece Kuwait
1998 Greece South Korea Spain France Netherlands Portugal US Germany Morocco Switzerland
1999 T k
Turkey R i
Russia malta
l I d
Indonesia
i S hK
South Korea M i
Mexico Fi l d
Finland J
Japan G
Greece E
Egypt
2000 Vietnam Mongloia China Nigeria Lativia Jamaica Denmark Bulgaria Tunisia Saudi  arabia
2001 Russia Mongloia Latvia Qatar Botswana Jordan Southkorea Slovakia Kuwait Nigeria
2002 Pakistan Romania Bulgaria Estonia Kuwait Russia Czech Republic Qatar Hungary  Slovakia
2003 Bulgaria China  Lithuania Brazil Thailand Argentina Turkey Kuwait India Chile
2004 UAE R
Romania
i E
Egypt M
Montenegro C l bi
Colombia Sl
Slovakia
ki S di A bi C h R
Saudi ArabiaCzech Republic
bli Lithuania
Li h i H
Hungary
2005 Montenegro Kazakhstan UAE Egypt Colombia Lebanon Saudi Arabia Russia Kuwait Mongolia
2006 Kazakhstan Peru Vietnam China Cyprus Mongolia Montengro China H Serbia Morocco
2007 Mongolia Ghana Montenegro China Slovenia Nigeria Croatia Mauritius Tur Brazil
2008 Tunisia Ghana Laos New Zealand Morocco Slovakia Lebanon Jordan Japan Qatar
2009 B il
Brazil R i
Russia S il k
Sri lanka P
Peru I d
Indonesia
i N
Norway T k
Turkey A
Argentina
ti Chil
Chile I di
India
2010 Mongolia Sri lanka Peru Ukrine Estonia Thailand Indonesia Chile Argentina Phillipines
2011 Mongolia Zambia Jamica US Phillipines Indonesia Qatar Mauritius New zealand Malaysia
2012 Turkey Egypt Phillipines Estonia Nigeria Thailand Kenya Pakistan Greece Laos
2013 UAE Abu Dhabi Bulgaria Nigeria Kenya Ghana Argentina Ireland Pakistan Finland
2014 Chi
China P ki t
Pakistan E t
Egypt I di
India S il k
Sri lanka Philli i
Phillipines A
Argentina
ti I d
Indonesia
i T k
Turkey Q t
Qatar
2015 Jamaica Latvia Hungary Denmark malta Slovakia Ireland Japan Estonia China
2016 Brazil Kazakhstan Peru Russia Pakistan Nambia Hungary Morocco Colombia Bulgaria

The top 10 stock indexes that gave global investors the greatest returns in 2016 were all emerging or frontier markets. Over the past 20
yyears, nine out of 10 best-performing
p g equity
q y gauges
g g have been in developing
p g nations, the figures
g show.

Source: Bloomberg, ICICIdirect.com Research

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Even volatility adjusted returns point towards EM’s (commodity oriented) strong
outperformance...
Top 10 Markets (Volatility adjusted returns ) : EM’s remain best performing after adjusting for price swings

Your Service
1st 2nd 3rd 4th 5th 6th 7th 8th 9th 10th
1997 Morocco Turkey Oman Portugal Denmark Ireland Saudi Arabia Switzerland Kuwait Hungry
1998 Morocco Belgium Greece Finland Mauritius U.S Italy France Spain Netherlands
1999 Turkey Malta Finland South Africa
South Africa Russia Sweden Saudi Arabia
Saudi Arabia Brazil Japan Luxembourg
2000 Vietnam Nigeria China Ukraine Tunisia Latvia Mongolia Jamaica Denmark Zambia
2001 Qatar Botswana Jordan Nigeria Russia Kuwait Romania South Africa Sri Lanka Slovakia
2002 Pakistan Romania Jamaica Oman Qatar Kuwait Estonia Mauritius Colombia Peru
2003 Bulgaria Peru Lithuania Thiland China H Kuwait Qatar Oman Jordan India
2004 UAE Lithuania Romania Ukraine UAE Egypt Slovakia Mauritius Australia Jordan
2005 UAE Egypt Malta
l Colombia
l b Saudi Arabia
d b Latvia Kazakhstan
kh Lebanon
b Kuwait Estonia
2006 Peru China Tunisia Bulgaria Croatia Vietnam Slovenia Cyprus Serbia Kazakshtan
2007 Oman Mangoila Nigeria Zambia Ukraine Slovenia Kuwait Mauritius Croatia Botswana
2008 Tunisia Lebanon Colombia Mexico South Africa Qatar U.K Chile China H Morocco
2009 Tunisia Sri Lanka Colombia Malaysia Indonesia Turkey Peru Taiwan Philippines Argentina
2010 Sri Lanka Mangoila Kenya Lithuania Peru Chile Estonia Mauritius Malaysia Thailand
2011 Botswana Jamaica Zambia Mongolia Qatar Philippines U.S Malaysia Indonesia New Zealand
2012 Kenya Botswana Pakistan Nigeria New Zealand Turkey Ghana Thailand Estonia Laos
2013 Zambia Ghana Botswana Mauritius Dubai UAE Kenya Nigeria Bulgeria Pakistan
2014 Sri Lanka China Botswana Zambia Tunisia Bahrain New Zealand India Serbia Kenya
2015 Jamaica Malta Botswana Latvia Hungary Denmark New Zealand Estonia Ireland Slovakia
2016 Kazakhstan Pakistan Morcco Peru Egypt Coratia Bulgaria Estonia Jamaica Russia

Hence, in the current EM /Frontier market risk-off sentiment it is important to create look at EMs and Frontier markets with strong
macros. Last two decades data suggests that even in strong dollar environment many EMs do outperform.

Source: Bloomberg, ICICIdirect.com Research

7
Pankaj Pandey Head – Research pankaj pandey@icicisecurities com
pankaj.pandey@icicisecurities.com

ICICIdirect.com Research Desk,

ICICI Securities Limited,
1st Floor, Akruti Trade Centre,
Road No 7,7 MIDC
Andheri (East)
Mumbai – 400 093
research@icicidirect.com

8
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