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Morgan Securities LLC
October 4, 2011
Emerging Markets Outlook and Strategy
EM sell-off likely has further to run… Emerging markets debt came under severe stress across all asset classes in the third week of September, with EMBIG and CEMBI spreads widening by 94bp and 108bp since then. Spot EM FX for the countries in the GBI-EM suffered the sharpest correction and are now down 9.1% year-to-date, leaving the GBI-EM down by 4.2%. The EM sell-off was the most pronounced in absolute and in relative terms since the Lehman Brothers bankruptcy, followed by the largest weekly outflow on record from EM debt dedicated funds at US$3.4 billion last week. It is hard not to draw the comparisons to Lehman episode given both the indiscriminate nature and rapid pace of the sell-off, alongside the growing fears that the DM economies are sliding into a simultaneous recession. With the exception of the EMBIG, all EM fixed income asset classes are now posting negative returns year-to-date. …Driven by near-term risk of greater outflows by foreigners With no safe havens left as a flight to quality and flight to liquidity take hold, EM remains susceptible to further outflows—particularly for those countries with high levels of foreign-holdership. Until mid-September, our client surveys and inflow data reflected net additions of positions and net inflows up. As of midSeptember, the highest levels of foreign participation in local government bond markets were: Hungary (37%), Indonesia (33%), South Africa (30%), Poland (30%), Malaysia (27%), Peru (49%) and Mexico (26%). Given the poor liquidity in many markets, investors may have little choice but to reduce liquid carry trades. Higher bank capital requirements implemented since the 2008 crisis have contributed to reduced secondary market liquidity for EM sovereign and corporate bonds, which has increased market volatility. There is asymmetry in the size of the investor positions given the US$170 billion of inflows into EM debt since early 2009 versus current market conditions. We raise our year-end EMBIG and CEMBI targets to 425bp and 525bp, respectively, and stay underweight CEMBI versus EMBIG. But we maintain our conviction on the longer-term positive prospects for the asset class The current sell-off is testing the sponsorship of EM debt as an asset class, but it is not related to EM fundamentals or EM funding needs. The extent to which the inflow story reverses is the key pressure point for EM debt across all assets. We have revised EM growth down to 5.6% this year and 5.0% next year; risks of a hard landing remain low. The growth differential to DM countries continues to widen with GDP growth for developed economies forecast at only 1.3% this year and 0.8% next year. Total estimated EM sovereign and corporate issuance needs are net negative given the US$39.1 billion of cash flows from sovereign and corporate bonds for the remainder of the year. With EM FX reserves now US$2.2 trillion higher than October 2008 levels, totaling over US$8.1 trillion, EM central banks have scope to intervene in the event of extreme volatility and we expect a domestic backstop bid to materialize at higher local yield levels. We reduce directional risk in Asia including our long held overweight SGD trade, but hold short USD/CNY and short TWD/THB. In EMEA EM, South Africa and Hungary have the greatest potential for deeper outflows and more volatility: keep short exposure in HUF and short Hungary 5-year bonds. BRL and MXN were the worst performing currencies in Latin America due to hefty positioning by international investors, but the region likely offers the best opportunities to add duration in the coming weeks: receive 2-year (Jan ’14s) in Brazil and 5-year TIIE in Mexico. ARS to adjust given the level of depreciation by trading partners: sell Dec 14 versus buy Mar 14 USD/ARS.
The certifying analyst(s) is indicated by the notation “AC.” See last page for analyst certification and important legal and regulatory disclosures.
Spreads and yields—actual and forecast
Current Year Forecast ago End-Dec 11
EMBIG GBI-EM Global Div CEMBI Broad Fed funds 10-year bond
Source: J.P. Morgan
490 6.73 532 0.125 1.78
305 6.27 332 0.125 2.48
425 6.70 525 0.125 2.25
EMBI Global, GBI-EM, JPMHY, S&P 500
Return index, September 30, 2010 = 100
120 115 110 105 100 95 90 Sep-10 GBI-EM Global Div. (USD unhedged) Dec-10 Mar-11 Jun-11 Sep-11 EMBIG US HY S&P 500
Source: J.P. Morgan
This is an abbreviated version of EMOS. The next full edition which will include individual country sections will be published in Novemeber.
(1-212) 834-4203 firstname.lastname@example.org J.P. Morgan Securities LLC
J.P. Morgan Securities LLC Joyce ChangAC (1-212) 834-4203 email@example.com
Emerging Markets Research Emerging Markets Outlook and Strategy October 4, 2011
Contagion hits EM: Brace for further fallout as market technicals and liquidity will drive performance near term
• The current sell-off represents a stress test of the sponsorship of the EM debt asset class, not a deterioration of EM fundamentals or concerns over funding needs • Potential for inflow reversal remains the key pressure point for EM debt across all assets • EM growth revised down to 5.6% this year and 5.0% next year (from 6.1% and 6.0%, respectively, back in June) • A total of seven EM central banks now expected to ease policy rates by year-end • We raise our year-end EMBIG and CEMBI targets to 425bp and 525bp, respectively; stay underweight CEMBI versus EMBIG • EM FX remains the most liquid adjustment valve to hedge bond positions, but central bank intervention is an offset: Korea, Brazil, Turkey, Russia, Poland and Peru among other countries have already intervened to curb extreme volatility • Greater risk seen for local market bond positions, especially those with high levels of foreign participation • Total estimated EM sovereign and corporate issuance needs of US$35.5 billion for the remainder of the year are net negative compared to US$39.1 billion of cash flows from sovereign and corporate bonds • Stay cautious on duration positions in EM Asia as the domestic backstop bid will materialize only at higher local yield levels • Reduce directional FX risk in EM Asia, including long-held overweight SGD trade, but hold short USD/CNY and short TWD/THB • South Africa and Hungary are most vulnerable in the EMEA EM region: keep outright short trades in South Africa 10-year bonds and Hungary 5-year bonds and underweight HUF and ZAR • BRL and MXN have been the worst performing currencies in Latin America due to hefty positioning by foreigners, but the region likely offers the best opportunities to add duration in coming weeks; receive 2-year (Jan ’14s) in Brazil and 5-year TIIE in Mexico; in Argentina, sell Dec 14 versus buy Mar 14 USD/ARS
EM debt now feeling the pain
Emerging markets debt came under severe stress across all asset classes in the third week of September, with EMBIG and CEMBI spreads widening by 94bp and 108bp since then, while EM FX fell by 9.1% YTD, leaving the GBI-EM down by 4.2% YTD. The EM selloff was the most pronounced in absolute and in relative terms since the Lehman Brothers bankruptcy, followed by the largest weekly outflow on record from dedicated EM debt funds at US$3.4 billion last week. It is hard not to draw the comparisons to the Lehman episode given both the indiscriminate nature and rapid pace of the sell-off, as well as the growing fears that the developed economies are sliding into simultaneous recession. With the exception of the EMBIG, all EM fixed income asset classes are now posting negative returns year-to-date. In turn, EM equities fell by double digits (14.8%) in September (chart 1).
Chart 1: EM has declined along with other asset classes
Gold UST US High Grade Global Agg EMBIG US High Yield CEMBI Broad GBI-EM Global div ELMI+ Commodities S&P 500 EM equities -26.0 -30
* September 19 to September 23. Source: J.P.Morgan
-6.9 16.7 0.8 9.7 -0.1 6.8 -0.7 -2.8 3.1 -1.0 -0.3 -3.1 -2.3 -3.0 -3.5 -1.7 -5.1 -7.2 -8.9 -5.6 -9.3 5.5
Third week September* 2011 YTD
Indiscriminate sell-off feels like 2008 all over again… Although we had positioned into this sell-off underweight EM corporates and short EM FX, we were not nearly underweight enough. In particular, the outsized EM FX move in September will make it harder for (unhedged) EM investors to stay in the long duration trade. Spot EM FX for the countries in the GBI-EM is now down 4.2% YTD. With no safe havens left as a flight-to-quality and flight-to-liquidity takes hold, EM remains susceptible to
0 2.P.com J. with flows lagging performance. Until mid-September. Mexico and Brazil local currency—these positions remain exposed if investors are under pressure to continue de-risking. rhs) 210 190 170 150 130 110 90 70 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Source: EPFR Global and J. our client surveys and inflow data reflected net additions of positions and net inflows up.P. South Africa (30%).m. Table 1 shows that foreign bond holdings increased in every major local currency market this year compared to end-2010. Chart 4: Hard currency fund flows and EMBIG ex-UST performance 140 130 120 110 100 90 80 70 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Source: EPFR Global and J. with the exception of Brazil. …Driven by near-term risk of greater outflows by foreigners Foreign bond holdings also remain high in more liquid EM countries. Table 1: Foreign bonds holdings as a percentage of local government bonds outstanding % (end of period) 2007 Turkey South Africa Poland Hungary Brazil Mexico Peru Indonesia Malaysia Thailand Korea Source: J. particularly for those countries with high levels of foreign holdership.Morgan EM Client Survey from a scale of -10 (most underweight) to +10 (most overweight) 4. rhs) 16 14 12 10 8 6 4 2 0 -2 3 . investors may have little choice but to reduce liquid carry trades further.0 1. The previous record for weekly redemptions from US and European mutual funds/ETFs occurred in October 2008 with US$1.J.0 -1. the highest levels of foreign participation in local government bond markets— ones which currently are vulnerable—were in: Hungary (37%).P. Morgan Securities LLC Joyce ChangAC (1-212) 834-4203 joyce. Morgan EMBIG Credit Return (ex-UST) Hard Flows ($bn.97 billion of outflows.P. Peru (49%) and Mexico (26%).2% 12% 40 35 30 25 20 15 10 5 0 -5 While positions have recently been reduced somewhat in the most crowded trades—South Africa. Malaysia (27%).com Emerging Markets Research Emerging Markets Outlook and Strategy October 4. Morgan 2008 10% 16% 14% 22% n/a 12% 30% 17% 14% 2% 8% 2009 9% 15% 18% 20% 8% 12% 21% 19% 17% 2% 10% 2010 13% 23% 26% 23% 12% 19% 46% 31% 22% 6% 15% Most recent 17% 27% 30% 37% 12% 26% 49% 33% 27% 8% 18% 13% 13% 20% 30% n/a 11% 30% 16% 15% 0. Poland (30%).P.chang@jpmorgan.P. Morgan Chart 2: Crowded trades vulnerable to further reductions Positioning based on the J. Charts 3 and 4 show that market performance and flows have tended to move together.0 3.nguyen@jpmorgan. Given the poor liquidity in many markets.P. Chart 3: Local currency flows and GBI-EM Global Diversified performance often move together 270 GBI-EM GD Return 250 230 Local Flows ($bn. As of mid-September.0 BRL MXN ZAR COP IDR CLP PEN MYR KRW PLN RUB TRY Source: J. 2011 further outflows.0 0. Morgan Securities LLC Trang NguyenAC (1-212) 834-2475 trang. Morgan Mid-Sep Rates Position Mid-Sep FX Position 1-month FX move versus USD (rhs) 28% 21% 14% 7% 0% -7% -14% Periods of poor price action are typically followed by slower flow momentum and outflows.0 -2. Indonesia (33%).
P. the gap between EM and DM sovereign metrics has widened since 2008 and credit ratings have converged.73%) and EMBIG (6. however.3% and will likely end the year below our forecast of 0.1% 2.P.4% firstname.lastname@example.org% 1. Now. US High Yield debt remains cheap. EM banks and corporates had issued a record US$464 billion in syndicated loans. we expect that European authorities will step in and employ their resources to address their debt issues before reaching this point. Capital injections that would ease the markets’ concerns about European banks are also manageable compared to the US financial crisis in 2008—in the range of EUR150-300 billion. Morgan Securities LLC Joyce ChangAC (1-212) 834-4203 joyce. EM debt ratios are well under half the level of developed countries: average debt to GDP for EM economies stands at only 34.P. 2011 But 2011 cannot be compared to 2008 with respect to EM fundamental and default risks….2% 0.8% 0. rates and credit positions are now held by a more diversified group of global and local investors today than in 2008. Based on our client survey taken at the IMF/World Bank annual meetings. which are largely invested in EM local bond markets.J. Morgan Securities LLC Eric BeinsteinAC (1-212) 834-4211 eric.3% 5. excluding Greece (5. boasting a 9. In 2008. US$150 billion of Eurobonds and US$210 billion of equity. Over the past four years. The EM corporate high yield default rate is currently running at only 0.com Emerging Markets Research Emerging Markets Outlook and Strategy October 4. such as banks and hedge funds represented nearly 50% of the market. this had been the pattern of prior crises.P.9% 10.3% 0.5%-pts. compared to the peak default rate of email@example.com% reached in 2009 (table 2). while their average fiscal deficit has risen to 7. a fifth key difference is that in October 2008 EM valuations looked rich compared to global credit. Table 2: EM default rates declining since 2009 US 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: J. Morgan estimates.3% 10.0% 7.9% 0. The fourth key difference is that three years ago leveraged investors. Morgan’s JULI investment grade index (4. EM corporate refinancing risks and default risks were much greater in 2008. While politics in the developed economies are clearly lagging the economic realities.0% of GDP. and part of the sell-off then reflected the expectation by some that EM would once again act as a higher-beta asset class to developed market assets on the downside. the debt and fiscal burdens of advanced economies increased by 30. Morgan Securities Ltd.P.37%) and comparable to yields for peripheral Europe. We note five key differences between 2008 and today. Finally.0% 0. the September 2011 sell-off puts the yields for the GBI-EM Global Diversified (6. Third. The average debt ratio has soared to 93.6%. Before 2008. cheap valuations and strong government support for segments of the US investment grade market crowded out crossover interest and inflows into EM debt.5% 0. We believe that hedge funds have fallen to 20-25% of the market share.8% 1.1% 0.53%) well above J.0% 9. It may take more stress in markets before these capital injections occur. Over the past two years. . In 2008.1% 8.4% 6. The ownership of EM assets now is in the hands of fund managers who remain vulnerable to outflows. We estimate corporate Eurobond rollover needs for the remainder of the year at US$17. according to both IMF and J.P.5% of GDP for DM economies.9%. and we favor US High Yield over EM corporates.2% EM FX. investors now understand that EM economies and EM financial assets do not automatically follow and underperform developed market trends. while the average fiscal deficit is 2. This compares to fears that total losses in the US banking system in 2008 had the potential to approach US$1 trillion. but are unlikely to be indiscriminate forced sellers as the banks and hedge funds were three years ago when the funding of their leverage disappeared.3% 15.0% 3. Domestic pension fund assets.6 compared to estimated 4 cash flows of US$31 billion. respectively.oganes@jpmorgan. as well as hedge fund deleveraging.0% 1. drove the dynamics in EM debt markets at that time.com J. which make us comfortable that the extremes that spreads reached then will not occur in the current crisis.3% 0.5% of GDP.8%-pts and 5. the global financial system was at a far more dangerous point and EM fundamentals and financing needs were much more vulnerable. partly because they have the benefit of hindsight from the Lehman default as to what might happen if they do not. have increased assets under management from US$1. Morgan EM 1.com J.83%). EM corporates have raised US$350 billion international capital markets. The current EM debt universe is also much larger than in 2008 and domestic investors are an increasingly important share of the market. the key concern from investors about the outlook for emerging markets centered on valuations.4 trillion in 2007 to US$1. held larger positions and employed more leverage than they do today. Lehman actually defaulted and the global financial system was on the verge of fully freezing up. Second. The rapid deterioration of the EM bank and corporate market. First.9 trillion at present. much of which has been used towards refinancing debt. Luis OganesAC (1-212) 834-4326 luis.49% yield. In the run up to 2008.7% 1.
Source: J.firstname.lastname@example.org trillion).nguyen@jpmorgan. Morgan Securities LLC Joyce ChangAC (1-212) 834-4203 joyce.2 Jan Feb Mar Apr May Jun Source: EPFR Global.1 trillion. Chart 5 shows that inflows into EM debt have steadily increased since the asset class suffered US$3.4%oya now versus 7. given the US$170 billion of inflows into EM debt since early 2009 versus liquidity in the current market conditions. Morgan Securities LLC Trang NguyenAC (1-212) 834-2475 trang.6 billion from the peak just before the Lehman crisis. the US$1. the better fundamentals and low financing needs give EM countries more policy flexibility than DM countries this time around. Table 3: Now versus then: EM macro indicators US$ billion FX reserves (eop)* 2008 current 437 654 45 193 23 24 4 85 30 33 715 36 33 42 57 36 412 29 71 2.huffman@jpmorgan. In 2008.97 billion weekly outflow at the end of October 2008 represented 4.2 trillion higher than 2008 levels. Moreover. followed Latin America (+US$217 billion) and EMEA EM (+US$214 billion).P. Morgan Yet it is important to note that this past week’s reading of outflows is less alarmist than the headlines given the size of the asset class now versus 2008. 5 . a key question was whether politicians—then mostly in the US—had the willingness to respond to the crisis.8% when Lehman collapsed). EM policymakers do have scope to ease policy rates since average EM inflation now is lower than in 2008 (6.m.3 Latin America Argentina Brazil Chile Colombia Ecuador Mexico Peru Venezuela EMEA EM Czech Republic Hungary Israel Poland Romania Russia South Africa Turkey EM Asia China Korea Indonesia India Malaysia Philippines Thailand Taiwan -3. The table also shows that current account deficits have only widened significantly in a few countries (Brazil. although it exceeds targets in many cases. FX reserves for EM total US$ 8. Bloomberg and J. EM FX reserves are now US$2. Today we worry about the ability to make decisions in Europe and the ability of both the US and Europe to respond.com J. Turkey and India).3 42. given that monetary options are mostly exhausted and fiscal policy is actually tightening rather than being loosened. Chart 5: EM inflows have reached nearly US$170 billion since early 2009 US$ billion 90 80 70 60 50 40 30 20 10 0 -10 2007 2009 2011 39.P.com Emerging Markets Research Emerging Markets Outlook and Strategy October 4. In contrast.6 billion earlier in the month. Inflows into EM weekly debt now stands at US$39. down from a peak of US$42.986 1946 201 52 256 92 36 111 292 49 344 35 32 3 137 45 11 929 36 50 73 93 47 496 41 93 4. Beware the asymmetry in investor positions versus market liquidity Higher bank capital requirements implemented since the 2008 crisis have contributed to reduced secondary market liquidity for EM sovereign and corporate bonds. providing EM countries room to maneuver and manage outsized volatility. while there was little doubt then about their ability.P.P. There is asymmetry in the size of the investor positions.s. By comparison.3 2008 2010 46. or US$23. Last week’s outflows represent only 2.2 billion of outflows for the full year in 2008.0% of the EM debt AUM at the time (chart 6). 2011 ….1 80.3 billion YTD.P.com J. Morgan Jul Aug Sep Oct Nov Dec * Aggregates for listed countries only.J.773 3198 312 125 319 155 76 188 400 Current account balance* 2008 2011F -15 -56 7 -29 -3 -7 1 -16 -5 37 -24 -1 -11 2 -29 -25 102 -20 -41 493 405 -6 0 -29 39 4 -3 25 -2 -50 -2 -11 -2 -10 -4 25 -18 -8 4 4 -26 -7 99 -14 -70 453 325 21 8 -54 22 8 13 43 Table 3 shows that since 2008 FX reserves have increased the most in EM Asia (+US$1. We expect both US and European banks to continue reducing balance sheet into year-end. Morgan Securities LLC Holly HuffmanAC (1-212) 834-4953 holly.While there is much less policy flexibility in DM versus EM economies in 2011 relative to 2008 Although current market conditions provide little comfort. We now expect full-year inflows into EM debt in the US$30-40 billion range versus our previous forecast of US$40-50 billion. which has increased market volatility and likely increased the spread impact of the selling.3% of the EM debt assets under management (AUM).
0% 46.5 billion invested in EM bond funds. Outflows of US$4 billion from Japanese retail investors have also attracted attention.7% cash holdings that investors held in January 2009 during the peak of the crisis (chart 7). EM FX overlay funds (primarily BRL) saw larger outflows of US$508 million. and the corporate CEMBI stood at US$417 billion as of September 2011 compared to US$233 billion tracked against it as of June 2008. Morgan Securities LLC Holly HuffmanAC (1-212) 834-4953 holly.0 -4.352 29.P.9% 4.2 -2.com J. while EM ETFs have grown fivefold.947 417.P.7 billion for EM bond funds and US$42. but smaller than October 2008 in relative terms 3% 2% 1% 0% -1% -2% -3% -4% -4.6% of the EMBIG and CEMBI assets under management tracked against the J.328 226.3% 133.0% 4.0% 6.P.5% Cash % Oct-08 6-month Moving Average Sep-11 Beyond the assets that are managed against the J.0 billion and US$500 million withdrawn.P. Last week’s outflows for hard currency and blend funds. Cash holdings as reported in our monthly client survey (taken on September 15). have increased at the margin this year and are currently running at 4.P. Chart 7: Current cash balances have declined compared to earlier this year. Table 5: Universe of EM funds tracked weekly by EPFR has grown three times. Morgan 6 . 2011 Chart 6: This week’s outflows were largest in magnitude.8 11.P. which tracked 183 responses from investors managing US$731 billion in EM debt assets. while EM ETFs have grown fivefold Oct-29-08 Weekly Flows (US$ billion) Weekly Flows as a % of AUM AUM tracked by EPFR (US$ billion) Size of EM ETFs (US$ billion) Size of Japanese EM ITs (US$ billion) Size of Japanese EM FX Overlay Funds (US$ billion) Source: J.3 58. The current cash level is slightly higher than just before the Lehman sell-off but below the 6. compared to an average of 4.5% 4.8 22.174 – 16.com J.5% 3. Morgan Sep-28-11 -3.494 27. which saw US$1. Morgan. represent only 0. Japanese investment trusts had only US$22. Morgan indices have almost doubled since pre-Lehman US$ million EM Indices Local Market Debt (GBI-EM) External Debt (EMBIG) Corporate External Debt (CEMBI) Local currency money Market (ELMI+) Total AUM managed against EM indices Total EM Assets – Survey Responses (3 month) Source: J. US$bn) 160 140 120 100 80 60 40 20 although they have been relatively flat since April.121 808.P. respectively. Morgan Securities LLC Trang NguyenAC (1-212) 834-2475 trang.0% 3. Morgan family of indices.P. In October 2008. Morgan family of indices.9 billion for EM FX overlay funds.m.1%.9 Total assets benchmarked against the external EMBIG. the universe of EM funds tracked weekly by EPFR has grown three times. Table 5 shows that AUM in Japanese ITs now stand at US$58. Assets benchmarked against the EMBIG amount to more than 50% of the size of the outstanding EM sovereign debt market.0% -2. but are running marginally higher than Lehman 7. We estimate that US$3. 5.3 billion at present. Morgan -2.1 1.3% in the past six months and down from the 4.186 Technicals point to more selling pressure as investors will likely increase cash holdings given the uncertain global environment and fears about increased redemptions after September’s sell-off.5 – Jun-08 35. The GBI-EM has nearly four times the assets under management now compared to October 2008.J. while the CEMBI was only launched at the end of 2008.com Emerging Markets Research Emerging Markets Outlook and Strategy October 4.P. local currency GBI-EM and ELMI. EPFR. Bloomberg 0 -5% Apr-08 Sep-08 Feb-09 Jul-09 Dec-09 May-10 Oct-10 Mar-11 Aug-11 Source: EPFR Global and J.7 42.3% Weekly Flows % AUM EPFR fund universe (rhs.8 billion in October 2008 to USemail@example.com billion since end-August largely due to lower valuations. Table 4: AUM benchmarked against J.0% Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 3.2 billion of inflows went to ETFs in 2010 and US$3.339 665.9% peak in March.865 181.s.300 233.huffman@jpmorgan. Morgan Securities LLC Joyce ChangAC (1-212) 834-4203 joyce. although AUM declined by US$2 billion over the week and US$8.760 Sep-11 133.nguyen@jpmorgan.P. While Japanese EM funds saw redemptions of US$159 million last week.3% Source: J.0% 5.1 billion went to ETFs year-to-date. EM bond exchange traded funds (ETFs) have grown from US$1.5% 6. while EM FX overlay funds did not exist.
Total sovereign financing requirements for the countries in the EMBIG for the remainder of the year are net negative and the remaining planned sovereign issuance of US$15. With EMBIG spreads now at 480bp. Source: J. implying increasing concerns of a slowdown in Chinese demand. followed by gold (-11%) and Brent (-11%). The EMBIG has become more correlated to the moves in commodity prices since January. The US HY pattern suggests there is a group of investors with little appetite for negative volatility who sell quickly.P.P. We believe that fears of a hard landing in China are exaggerated. Chart 8: Current EMBIG sell-off is modest compared to 2008 EMBIG spreads (bp) 1000 900 800 700 600 500 400 300 200 Jan-08 Source: J. Commodities declined across the board in September due to increasing concerns about slowing global growth. but these were not sustained and were partly reversed in subsequent weeks. Morgan Securities LLC Holly HuffmanAC (1-212) 834-4953 holly.m.5 billion in EM Asia (see table 6 on the following page). we characterize these entire amounts as discretionary as sovereigns could easily rely on savings or alternative domestic funding sources if external capital markets remain closed for the rest of the year. Morgan 60% 40% 20% 0% +632bp +184bp +128bp -20% -40% Jan-08 Jan-09 Jan-10 Jan-11 Jan-09 Jan-10 Jan-11 * J. Morgan Securities Ltd.J.huffman@jpmorgan. According to our estimated issuance plans for 2011. Jonny GouldenAC (44-20) 7325-9582 jonathan. but then the wider spreads help slow and then reverse the outflow trend.0. spread compression in the EMBIG took time to reach pre-crisis levels—almost a year and a half. Morgan Securities LLC Warren MarAC (1-212) 834-4274 warren. 2011 A review of the recent fund flow trends in the US High Yield bond market is helpful for context of the large outflow experienced in EM fixed income last week.5 billion in the Middle East and Africa.6% for US High Yield making the market more attractive. The S&P GSCI Industrial Metals index was the worst performer in September (-20%).5 billion is entirely discretionary. it has been difficult for EM sovereign investors to add risk into a market where spread widening had clearly lagged other markets.com J. From mid-May to end-August. In both the June and August episodes. US$2 billion in Latin America and US$1. Morgan Commodities Index. In turn.mar@jpmorgan. Chart 9: EMBIG returns have become more correlated to moves in commodity prices 3-month moving correlations versus EMBIG 80% WTI S&P500 Commodities* EM sovereign and corporate credit unlikely to follow 2008 extreme moves EMBIG spreads have widened and positions reduced.9. but risk are now biased to the downside. and in September there were inflows each week despite a negative market environment. there was one large weekly outflow over US$3 billion and then much smaller outflows afterwards.s. Twice this summer. the GSCI Agriculture declined 20%.com Emerging Markets Research Emerging Markets Outlook and Strategy October 4.P. This past month’s moves remain modest compared to 2008 when EMBIG spreads widened by 567bp during the Lehman episode. We believe that demand from Asia coupled with ongoing supply issues in the North Sea and OPEC production cuts will support global oil prices. but not enough yet to warrant an outright overweight while the global backdrop still remains uncertain. yields widened from 6.6 points to 51. so EMBIG spreads are no longer a large outlier in terms of movement.j. bringing the latter to its lowest level since February 2011. remaining needs for 4Q11 are US$7. However.73% to 8. US HY funds had a week or two of sharp outflows. The activity index rose even more strongly to 53. China’s services PMI posted a solid gain in September. rising 1.P. Contrary to the local market firstname.lastname@example.org J. they have widened 53% since mid-May compared with 55% now for US High Yield and 68% for US High Grade. Morgan 7 .P. consistent with official data pointing to moderate growth in the economy. during the months of June and August. US$4.4 billion in Emerging Europe.P. given the increased importance of crossover flows into EM debt over the past few years. while the correlation of the EMBIG to US equities has begun to decline (chart 9). For much of the past year.
the currency component of the GBI-EM GD index has fallen more half as much (12% versus 20%).000bp on the CEMBI Broad.email@example.com 500 750 500 256 4. Based on these assumptions.000 2.000 788 1.com J.749 1.000 3. it is not inconceivable— given constrained liquidity—that investment grade (currently trading at 369bp) and high yield spreads (currently trading at 917bp) retrace as much half of their 2008 highs of 798bp and 2. 2011 Table 6: Remaining sovereign borrowing requirements are fully discretionary Gross Issuance Forecast Fiji Indonesia Malaysia Philippines Sri Lanka Brazil Chile Colombia Dominican Republic El Salvador Jamaica Mexico Panama Peru Trinidad and Tobago Uruguay Venezuela Belarus Croatia Czech Republic Georgia Hungary Latvia Lithuania Macedonia Montenegro Poland Romania Russia Serbia Turkey Ukraine Angola Bahrain Israel Lebanon Nigeria Senegal South Africa Tanzania United Arab Emirates Zambia Asia Emerging Europe Latin America Middle East and Africa Total Source: J. ZAR. Chart 12 shows that IDR and TRY stands out as only selling off less than one-third of the move during the Lehman episode.100 500 5. Chart 10: CEMBI sell-off may have further to go and is well below 2008 volatility CEMBI-Broad IG versus CEMBI-Broad HY (SOT avg life.911 9.500 500 9. relative to the month around the Lehman crisis. bp) 2500 Investment Grade component 2000 1500 1000 500 0 Dec-07 Jun-08 Source: J. Chart 11 on the following page shows the peak-to-trough move for several EM currencies in late 2008 around the Lehman crisis versus the depreciation from recent highs to date.560 500 1.000 1.j.177 3.P. and SGD.257bp. Relative to its long-term relationship with the euro that we identified in September’s EMOS.P.000 1. Morgan Securities LLC Warren MarAC (1-212) 834-4274 warren.P.firstname.lastname@example.org 1.5 standard deviations too low.343 2. MYR and THB have moved nearly 80% as much as they did in 2008 (though the moves were small in both episodes).500 2.176 1.000 500 654 400 3.465 500 500 750 – 500 – 8.151 2.176 1. respectively. Morgan Gross Issuance YTD 250 2. BRL.200 800 2.000 2. while it reached approximately 3 standard deviations below the level suggested by the euro in late 2008.447 2. Morgan High Yield component CEMBI-Broad Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 EM FX weakness has been acute the third week of September.327 Remaining – 1.900 3.J.349 3.587 – 500 5.m.000 500 1.000 2. Morgan Securities Ltd.000 2.000 500 654 400 3. respectively).P.com J.994 2.786 EM corporate spreads moved above 500bp in September.999 36. 8 . Corporate spreads could initially overshoot before retracing by year-end to our forecasted 525bp level.994 2. Morgan Securities LLC Holly HuffmanAC (1-212) 834-4953 holly.685 500 750 – 256 4.500 15.200 800 3.459 250 4. and KRW have depreciated by just under 40% relative to the Lehman sell-off.343 2. we revise our year-end spread for the CEMBI Broad to 525bp (implying IG and HY spreads peak around 380bp and 975bp.000 2.012 4.P.500 – – – 1.499 29.215 71.212 – – – – – – 500 300 – – – 413 2.000 2.715 56. Jonny GouldenAC (44-20) 7325-9582 jonathan. suggesting that we have entered into a feedback loop whereby outflows and market performance are moving into a trading pattern that more closely resembles 4Q08.899 4.465 500 500 750 500 1. EM FX is currently 1. Although we believe that lower default expectations will prevent us from breaching 1.000 500 – – 514 4.214 13.440 – – – 2.749 1.500 7. There is significant variation when viewed on an individual currency basis.000 500 500 300 514 4.661 15.s.100 – – – – 500 – – 723 – – 1.000 – – – – 500 1.com Emerging Markets Research Emerging Markets Outlook and Strategy October 4.500 6.000 500 1.000 4.goulden@jpmorgan.
their equity and funding markets have been under tremendous strain. Initially. pp.P. IMF.com Emerging Markets Research Emerging Markets Outlook and Strategy October 4.5 0. to use national resources to backstop their banks. risks focused on Greece.Morgan Any decisive rally in financial markets remains dependent on clear policy actions in Europe Market focus will remain centered on whether European policymakers. Morgan Securities LLC Joyce ChangAC (1-212) 834-4203 joyce. Michael MarreseAC (44-20) 7777-4627 michael. 2011 Chart 11: EM FX depreciation versus USD around Lehman crisis and 2011 (%) BRL 0 -5 -10 -15 -20 -25 -30 -35 -40 2008 moves are peak-to-trough versus USD during Aug-Dec. Spain and Italy (collectively know as the six high-spread Euro area). Euro area sovereign risks have contaminated banks as secondary market bond yields for both sovereigns and banks have widened markedly (chart 13). the Netherlands. 16-28). and Euro-TARP: up to EUR150 billion to ease the funding crisis. Alongside the use of EFSF resources.9 0.5 trillion of Euro area government debt is high-yielding1. should private sources of recapitalization prove insufficient. Capital injections that would ease the markets’ concerns about European banks are manageable—in the range of EUR150-300 billion according to most estimates. See Global Financial Stability Report: Grappling with Crisis Legacies. 2011 moves are peak-to-trough versus USD August to October 3 Source: J. as well as offer precautionary credit lines.Morgan ZAR KRW TRY MXN IDR RUB INR SGD MRY THB spread countries. Our European bank credit and equity analysts estimate a EUR150-170 billion capital shortfall by applying more punitive stresses on sovereign 1. and most European banks are unable to access unsecured term-financing.6 0.1 0 IDR TRY KRW BRL ZAR MXN INR RUB SGD MYR THB 2008 moves are peak-to-trough versus USD during Aug-Dec. The IMF estimates that nearly half of the outstanding EUR6. France. we would expect countries firmly in the core of the Euro area.P. the EFSF and the ECB announce clear mechanisms to support bank recapitalization and increase the EFSF’s firepower. Ireland and Portugal in the context of the current EU/ECB/IMF programs for those countries. even in non-IMF program countries.P.J. The enhanced EFSF will be able to buy sovereign Euro area bonds in the secondary markets and make sovereign loans to fund bank recapitalization. September 11.P.marrese@jpmorgan. Morgan Securities Ltd.7 0.2 0. 2011.3 0.com J. including the IMF and J. Austria and Finland.4 0. 2011 moves are peak-to-trough versus USD August to October 3 Source: J. We also believe that precautionary credit lines could be provided for Italy to help backstop any direct state recapitalization of Italian banks. such as Germany.8 0.Morgan Source: J. Since European banks hold a large amount of the high-yielding government bonds of high- Leverage of the enhanced EUR440 billion EFSF for bank recapitalization as well as national directives that banks increase their capital—either privately or via individual country injections of capital—are necessary to restore market confidence. 2011 (Summary Version.P.chang@jpmorgan. 9 . Chart 13: European bank and sovereign spreads now trade well beyond 2008 levels 5-year CDS spread (bp) 400 iTraxx Europe Senior Financials 350 300 250 200 150 100 50 0 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 iTraxx Europe SovX Western Europe 2008 2011 Chart 12: EM FX depreciation as a percentage of 2008 (%) 0. The EFSF can be used to support banks in Greece. September 25. 2011). and more recently on Belgium. July 18. then on Ireland and Portugal.P. Morgan (see EBA Stress Test Results Analysis: Must do much better.
chang@jpmorgan. EUR6. The mechanism for this capital increase would be national requests for new bilateral loans from surplus countries (Japan. It is possible that core countries might 2. September 22. and Spain and Italy 20%.P. 3. Using those haircuts implies a capital shortfall among all European banks of EUR148 billion. Michael MarreseAC (44-20) 7777-4627 michael. See “The Preferred Route” in European Credit Outlook & Strategy. See What Now For Tier I? European Bank Recapitalisation and Burden Sharing Outcomes. while the FROB (Spain’s capital injecting backstop) took over four banks (for a total capital contribution of EUR7. China. Table 8 highlights the calendar of political events ahead in both the US and Europe. the IMF behind the scenes may be examining ways to increase the size of their facilities from the current level of US$400 billion via some changes in provisioning and new bilateral loans. which requires that all financial institutions meet required 8-10% levels of core capital.259 trillion exposure of core European banks to peripheral European geographies suggests a potential shortfall in available resources under certain tail scenarios.9% average staff cuts plus 17. September 22. and. IPO financing and mergers and consolidation. The IMF comes up with higher losses for the EU banking system from sovereign credit risk exposure. Morgan Securities Ltd.marrese@jpmorgan. For Spain. EUR10. with the country breakdown shown in table 7. the lessons learned from the US TARP highlighted that the relative success was in large part because the available resources were far in excess of the capital which was eventually deployed and recapitalization was also forced on US banks. implying that extra capital of EUR300 billion would allay market concerns. 2011 debt as well as some nominal adjustments to expected loan losses in some jurisdictions2. interbank linkages as measured by exposures to the banks in the high-spread Euro area constitute an additional EUR100 billion to the banks’ direct exposure to high-yield Euro area government bonds.P. It also remains to be seen whether proposals to leverage the EFSF to a higher headline figure will come to fruition given the constraints imposed under the ECB by-laws and Maastricht treaty as well as the need to avoid going back for additional parliamentary approvals. Portugal and Ireland 40%. Spanish banks increased provisions by EUR105 billion (more than 10% of GDP or the equivalent of 50% of total core capital) and conducted 16. 2) providing guarantees through the EFSF so that it assumes first loss in the event of default.com Emerging Markets Research Emerging Markets Outlook and Strategy October 4. The IMF marks-to-market the banks’ direct exposure to government bonds from the six high-spread countries at about EUR200 billion (note this is not a measure of stresstested capital needs of European banks). our European credit research team believes that there is a far higher probability of euro-TARP emerging by stealth as a result of a single country taking the lead and thus applying peer pressure on other member states to follow suit3. 2011. During Spain’s clearly articulated strategy to improve the metrics of its banking system. Morgan follow the lead of Spain.3 billion for listed Spanish banks.5 billion for listed EMEA EM banks. Proposals under discussion reportedly include: 1) using either the ECB (or another multilateral entity) to provide leverage to the EFSF so that the lending capacity is increased to EUR1 trillion or higher. Political cohesion has also held in Spain relative to other countries in the periphery. 2011 10 .P. Morgan’s estimate of mark-to-market losses to holdings of high-spread European debt at EUR148 billion EUR14.8 billion for German listed banks.5 billion for listed Italian banks. Qatar) to finance new facilities.9 billion for listed French banks.P. EUR13. In addition. Table 7: J. Beyond measures to leverage the EFSF. For these 13 banks. EUR7. 11 banks filled the capital shortfall through injections from parent banks.J. However. M&A activity. 3) potentially transforming the EFSF into a bank with a capital injection from the ECB.com J. We remain skeptical that pan-European solutions for bank recapitalization will gain momentum since banks will need to be recapitalized on the basis of accounting standards and stress tests.2% of branch office reductions among the merged former cajas (savings banks). The EUR1. Rather. the debate is back on about whether an IMF Flexible Credit Line would make sense since Spain has stood out amongst the periphery for implementing reforms (with the exception of labor reforms). Official creditors assert that the new Spanish government that will take office after the November elections is likely to reinvigorate structural reforms and will be fully committed to fiscal consolidation. Saudi Arabia. EUR2. Morgan Securities LLC Joyce ChangAC (1-212) 834-4203 joyce. This Spanish exercise determined that 101 of 114 financial institutions met the new minimal capital requirements as of March 2011 and that 13 needed to raise their core capital. with bank backstops under national supervisory authorities. Two small banks are still searching for investors. and EUR90 billion for smaller listed European banks Source: J.1 billion for listed domestic UK banks.56 billion). estimating cumulative spillovers of EUR300 billion. The following haircuts on government debt are utilized by our equity analysts: Greece 60%.
Morgan forecasts a contraction in the Euro area of -0.6% in 2011. These revisions take J.com Emerging Markets Research Emerging Markets Outlook and Strategy October 4.9% growth. Singapore David FernandezAC (65) 6882-2461 david. Michael MarreseAC (44-20) 7777-4627 michael.P.P. 11 . Morgan’s latest growth forecast for the Euro area calls for a mild recession lasting from 4Q11 through 3Q12 and is conditional on the assumption that the region’s policymakers move aggressively to support banks and sovereigns from the fallout of a Greek debt restructuring next year. Morgan’s forecast to developed economies’ growth to only 0.P. J. and ongoing market turbulence in the quarters ahead as European troubles get sorted out. Morgan 3 3 3 4 4 6 6 9 11 14 14-15 17-18 23 3 3-4 7 8 10 14 15 18 20 23 29 30 30 2 8 8 9 15 23 Implications for EM growth and policy actions: Mounting risk for 1H12 We now expect EM growth to moderate to 5. Although the US forecast still calls for growth at a 1% average over the next three email@example.com% next year.com J.. the growing odds of a US recession. completing the voting process by the 17 European countries to ratify the amendments Deadline for House and Senate committees to submit recommendations to the super committee G20 finance ministers meeting EU Council Meeting (EU heads of state) Federal elections ECB rate announcement G-20 Cannes Summit Eurogroup meeting (17 finance ministers) Ecofin meeting (27 finance ministers) BOE rate announcement Greece local elections Peripheral Europe flash GDP (3Q10) Continuing resolution to fund the US government expires General elections (early) Deadline for the super committee to vote on a plan with the goal (not a requirement) of US$1. Morgan Securities LLC Joyce ChangAC (1-212) 834-4203 joyce.3% this year.com J.P. Specifically. Morgan Securities LLC Luis OganesAC (1-212) 834-4326 luis. 2011 Table 8: Headline noise to remain high: Heavy political calendar for US and Europe Month October Day Date Country/region Germany Greece Greece Euro area Malta Euro area US Euro area UK France Slovakia US G20 Euro area Switzerland Euro area G-20 Euro area Euro area UK Greece Euro area US Spain US Euro area Euo area Greece Germany US Euro area UK Euro area Greece US Event German parliament vote on 2nd Greek bailout Fifth IMF review results Greek exchange offer to be finalized as of this date Eurogroup meeting (17 finance ministers) Possible vote on EFSF amendments Ecofin meeting (27 finance ministers) Congressional super committee hearing on the economic outlook ECB rate announcement BOE rate announcement Socialist Party—Presidential Primary 1 Scheduled to vote on EFSF.A. our US economists concede that there is a 50% probability that the US also falls into recession.P. even after several downward revisions across the three EM regions over the past week. Taking into account the new Euro area forecast.fernandez@jpmorgan. we have lowered our GDP growth forecasts in many EM countries.5 trillion in deficit reduction Eurogroup meeting (17 finance ministers) Ecofin meeting (27 finance ministers) Sixth IMF review begins German parliament vote on ESM ratification (tentative) Super committee must submit report and legislative language to the President and Congress ECB rate announcement BOE rate announcement EU Council Meeting (EU heads of state) Sixth IMF review results (expected) Deadline for the House and Senate to vote on the super committee’s bill Mon Mon Mon Tue Tue Thu Thu Sun Tue Fri Fri-Sat Mon-Tue Sun November Thu Thu-Fri Mon Tue Thu Mon Tue Nov Sun Wed Tue Wed Wed December Fri Thu Thu Fri Thu Fri Source: J.5%oya in 2012 compared to an earlier prediction of 0.J. Morgan Securities Ltd.P. J.0%oya in 2012 from 5.P.firstname.lastname@example.org@jpmorgan.com JPMorgan Chase Bank N. down from 1.
0 3.8 3.0 4.6 3.7 4. dropping from a lofty 12% at the end of last year.2%oya for 2012 resulted from a second round of downward revisions since mid-year.8 1.7 4.8 1. Manufacturing PMI fell to a 2-year low in India but services growth and agricultural growth remain robust.1 4.2 4.6 6.5 4.5 5.5 4.0 2. We retain our FY2012 growth forecasts of about 7.3 5.6 4.7 5.3 3. our forecast anticipates a steady decline in growth. not further deteriorating.6 5.P. with Chinese economic activity stabilizing.1 6.0 3. Michael MarreseAC (44-20) 7777-4627 michael.P. We have also cut growth considerably in Russia (-0. The new regional average growth forecast of 3.0 3. Colombia. a broad array of activity indicators (IP.0 2.5 7. current forecast versus forecasts as of June 30.5 3.8 Recent downward revisions to J.8 5.0 7.8 4.5 5.0 3. While the new EM growth average of 5.0 3.5 3..0 4.4 4. Elsewhere. Singapore David FernandezAC (65) 6882-2461 david.5%oya for now.5 3.5 7. Brazil.P.8 4.2 3.3 -7. retail sales. with commodities representing nearly 50% of Latin American exports (and well above that level in countries like Argentina. in our view.7 6. Table 9: EM Real GDP growth revised down along with developed markets %oya. manufacturing PMIs.5 7. but to still be 7.9 5. Given that 12 .7 2.com J.email@example.com 3.5 6.5 8.4 3.1 End-June 1.7 6.8 4.marrese@jpmorgan. Poland (-0.5 2.4 3. Chile.J. after lowering our 2011 and 2012 forecasts sharply in August. both in 2011 and 2012.1% in 4Q11.9 3.0 1. and now stands well below the region’s estimated potential growth pace of 3.5 3.8 4. or not changed (Turkey and Israel).3 5.0 4.6 4.4 4.0% is nearly a point below the end-June estimate.9 4. While the trade linkages of Latin America and Europe are not as significant as with the US.5 7. Latin America’s GDP growth forecast was cut further to 3. Morgan’s Euro area growth forecasts have prompted us to cut our 2012 forecasts for the EMEA EM region further.2%-pt).7 4. Morgan Securities Ltd.5 2. In our latest round of adjustments.A.3 4. On a sequential basis.0 3.0 4.7 3.0 3.9 4.9 4.5 4.5 4.2 4.6%-pt) due to their high trade exposure to the Euro area.8 4. In India.5 8.6 4.0 0. But. low growth or a recession in both will certainly hurt Latin American exports. 2011 2011 Current Developed Markets Emerging Economies Latin America Argentina Brazil Chile Colombia Ecuador Mexico Peru Venezuela Emerging Asia ex China / India China Hong Kong India Indonesia Korea Malaysia Philippines Singapore Taiwan Thailand EMEA EM Bulgaria Czech Republic Egypt Hungary Israel Kazakhstan Nigeria Poland Romania Russia South Africa Turkey Ukraine GCC Source: J.5 7.7 3.8 5.5 2.9 4. In China.8 1.5 5.6 8. the possibility of further correction in commodity prices would unwind some of the terms-oftrade gains that have supported consumption and investment in the region in recent years.9 6.5 5.8 1.5 3. due to a steady diet of 12 RBI hikes. our GDP projection of 7.1 4.1% critically assumes that both China and India will not see growth drop below a 7% pace through year-end.0 6.8 4.3 6. Moreover. EM Asia stands out in our global forecasts as still anticipating a relatively solid growth outcome.5 4.8%-pt) and the Czech Republic (-0.3 5.5 8.5 4. and fixed investment) are consistent.P. it is still above the 2.0 5.0 3.2 7.6 4. we believe the slowdown in EMEA EM will be most pronounced in 4Q11 and 1Q12.7 4.7 0.3 2.7 3.7 5.5 3.0 2.3 3.6 3.0 6.7% and the IMF’s latest projection of 4%.0 1.9 6. South Africa (-0.2%-pt).2 2.5 3. down to 7% in 2Q11.0 3.5 3. while for Hungary this also incorporates the latest fiscal tightening measures.0 4.5%-pt) as a result of the local liquidity squeeze.6% registered in 2009 when many EM countries fell into a brief recession in the aftermath of Lehman.8 End-June 2.6 5.2%oya in 2012.0 5.6 7.3%-pt).1 4.8 5. Peru and Venezuela).8 9.1 2. we reduced 2012 growth most sharply in Hungary (-0.5 firstname.lastname@example.org 6.2 7.3 3.2 3.0 4.1 9.1 4.0 6.4 1.5 4. Morgan Securities LLC Luis OganesAC (1-212) 834-4326 luis.8 2.4 2. growth decelerated sharply in the first half of the year.0 3.0 4. Morgan 2012 Current 0.6 4.5 3.com JPMorgan Chase Bank N. revisions were either modest: Romania (-0. with most countries expected to decelerate to a below-potential pace next year. 2011 Table 9 shows the cumulative growth forecast revisions made since the end of June.com Emerging Markets Research Emerging Markets Outlook and Strategy October 4.3 6.0 8.0 8.0 1.1 7. For 2011.7 2.
Again using 2009 as a benchmark. a level of 86 million barrels per day for global petroleum demand was sufficient to exhaust the global oil productive capacity of the world at that time and force prices to a peak of $147 per bbl in July 2008.5%-pts to regional GDP growth.4 Our forecast for full-year 2011 GDP growth for China stands at 8. 2011 13 . Thailand.5%. 2011 China and India together carry a nearly 70% weight in the EM Asia aggregate. since we estimate that approximately 36. Our commodities group projects that 4Q 2011 Chinese petroleum demand will cross 10 million barrels per day for the first time ever and global petroleum demand will cross 90 million barrels power day for the first time ever. the government has taken a series of measures to 4. For EM Asia ex China and India. HK Haibin ZhuAC (852) 2800-7039 haibin. in 2009. while our forecast for 2012 is that it adds 0. the dominant concerns on DM demand uncertainty going ahead appear to hint at some moderate downside risks on the growth forecasts for China. pointing to a potential downside risk to our current 2012 forecasts. thanks to the much-delayed arrival of the private investment cycle. in 2010 and in our 2011 projection.5% (from 7. Perhaps more importantly.J. in a deeper DM slowdown scenario. Singapore David FernandezAC (65) 6882-2461 david. If the European and US outlooks darken further. Morgan Securities Ltd. in other words. suggest that the economy has continued to track a steady. For 2012. Chinese domestic demand is expected to be supported by the government’s large affordable housing program. Overall..7% in 2012 again highlights their importance. The real estate sector in China remains a major source of risk. have taken its toll on our forecasts.com JPMorgan Chase Bank N. our 6. if the global economy and external demand conditions worsen notably from here. persistent weakness in US and European growth. all of the region’s 9.com JPMorgan Chase Bank N. especially for investment (including inventories). Since last year. Note that in 2009.9%-pts drag as its export growth slumped. this drag would get larger. net external demand contributed zero. Importantly. moderate growth trend through August and September. net external demand took off 1.A.com J. China’s near-term growth indicators.0%q/q (saar) growth rate recorded in 2Q. A look at the components of our 2012 GDP forecasts for EM Asia sheds light on why we anticipate the region will hold up relatively well. On the policy front.com Emerging Markets Research Emerging Markets Outlook and Strategy October 4.8%-pt. gross domestic investment contributed a sturdy 3.fernandez@jpmorgan. September 26.P. as well as solid overall employment growth and broad-based wage gains. our assumption that domestic demand growth stays resilient would also be at risk. where our forecast for Malaysia. China and India). Michael MarreseAC (44-20) 7777-4627 michael. it is hard to get the regional forecast to move dramatically unless our views on these two heavyweights change significantly. Looking further ahead. taking away 3%-pts from GDP growth.6% in 2011).A. Our current estimates look for China’s 3Q real GDP growth to be close to the 7. China growth and demand for commodities to hold this year Our EM growth forecasts depend heavily on China’s performance. investment was a large drag. external demand has not been a net positive for Asian GDP growth. Indeed.marrese@jpmorgan. some substantially so. adopting a “wait-and-see” approach for its monetary policy stance in the very near term. with our forecast anticipating a mild upturn to 8. and Singapore are around 3%-pts or more below market consensus. with our forecasts for each country below consensus expectations. although we think the likelihood of a housing market collapse is very small in the near term.9%oya.1% growth this year. For 2012. Indeed. We anticipate the biggest growth disappointments to be in Southeast Asia. from a GDP accounting point of view. In particular. China’s share of global commodity demand also continues to grow.2%-pts from EM Asia’s GDP growth. See Commodity Markets Outlook and Strategy: how to achieve escape velocity.5% in 4Q. the regional forecast is pushed higher by our expectation that Indian GDP growth will accelerate in 2012 to 8. with China seeing an exceptionally large 3. while also highlighting the sources of downside risk. our forecast for EM Asia to expand by 6. we expect GDP growth of 3. Since 2008.5% of the contribution to global growth will come from China this year. Morgan Securities LLC Luis OganesAC (1-212) 834-4326 luis. In 2008. is being generated by domestic demand. Outside of India and China.P. leaning first on fiscal policy.oganes@jpmorgan. while for 2012 we expect GDP growth of 8. our baseline scenario remains that China’s central bank will pause from further interest rate moves for the rest of the year. and the prospect of even weaker DM growth going forward. with the pre-condition that headline CPI is seen to have clearly peaked.5% for EM Asia (ex. we believe the Chinese government may consider adopting some supportive measures..7% regional growth forecast assumes a -0. including IP and manufacturing PMIs. despite growing uncertainty on the global economy.2% growth in 2010 and our expectation of 7. especially going into 1H12.zhu@jpmorgan. but this was entirely due to China’s massive fiscal and bank lending expansion. then followed by a moderate easing on liquidity conditions and the credit control measures.3%-pt drag from net external demand.
While the speed of the recent drop in EM FX caught many policymakers by surprise.A.75 Source: J. Demand remains strong. and a total of seven EM central banks are expected to cut rates from now to year-end.75 3.75 5.00 4.00 4.75 3. but the next line of defense will likely be policy rate cuts— particularly in Latin America and EMEA EM.81 3. Latin American central banks.50 6.50 4. 14 .75 6.00 2.00 3. policymakers have the ability to manage the property cycle (most measures are on the demand side and can be easily loosened in implementation.30 4.50 1.75 6.25 5. In addition.50 3.56 3.75 6.40 0.90 Latin America 8.62 0. 175bp in Chile.75 4.50 3.75 5. Michael MarreseAC (44-20) 7777-4627 michael. top leaders have strong incentives to gain points by achieving the housing stabilization objectives.com JPMorgan Chase Bank N.875 3.25 3.56 6.J.P.75 5.50 6.50 5.75 5.75 5. and property is still a key source of local government revenue.75 5.12 7.75 4.00 4.50 1.50 6.5 4.00 5.14 7.75 0.00 5.56 4Q 2012 (+25bp) 6.00 5. income growth.00 email@example.com 3. Morgan Securities Ltd.50 5.00 6. the shekel’s rise over the past month contributed to the BoI’s decision to deliver an earlier than anticipated rate cut on Monday.00 Oct-19-11 (-50bp)12. politically a collapse scenario in the housing market carries enormous risks.25 4.00 3.75 5.75 3.75 3.00 11.76 On hold 2Q 2012 (-25bp) Oct-24-11 (-25bp) 1Q 12 (-25bp) 1Q 12 (-25bp) 3Q 12 (+25bp) 4Q 11 (-50bp) Oct 12 (+25bp) 10. Indeed. Weaker FX gives EM policymakers time to cut rates Many EM policymakers have shown willingness to tolerate weaker currencies in response to the deteriorating global growth environment.50 4.P.00 3.00 6.50 4.00 5.75 5.00 On hold 3.50 3.73 5.75 5.00 3.50 4. Israel and Turkey—surprised markets by cutting policy rates preemptively over the past month despite their inflation and FX dynamics.00 3.75 0.75 1Q 2012 (-25bp) 6.00 4.25 4.50 8.00 10.00 3.00 3.75 5.25 4.12 7. Morgan Ongoing FX weakness raises the bar for rate cuts in some countries.25 8.50 4.56 6.75 3. and should not be over-interpreted as an indicator for a collapse. or even reversed).75 5.72 5.19 0.80 0..50 4.50 10.50 3. and 50bp in both Mexico and Peru (table 10).50 6.62 0.00 5.75 0.50 8.P.25 3.56 6.00 4.50 On hold 4.25 6.81 5.com J.8750 4Q 2012 (+12.62 0.75 3.50 5.15 7.50 6.75 5. Importantly. Table 10: EM central banks begin easing already this year Current Forecast rate (%pa) next change Sep 11Dec 11Mar 12 Jun 12 Sep 12Dec 12 Developed 0. Indeed.50 2Q 2012 (+25bp) 3.12 12. removed.50 8.85 6. The housing market is likely at the turning point: transaction volume has fallen in the past two quarters and prices are now flat.50 4. the cooldown in the housing market and the pressure on real estate developers are in line with the objectives of stabilization policies.56 3.50 3.25 Nov-15-11 (-25bp) 5.62 0. Singapore David FernandezAC (65) 6882-2461 david.75 3. Morgan Securities LLC Luis OganesAC (1-212) 834-4326 luis.50 4. three EM central banks—Brazil. However.875 3.25 Dec 2011 (-25bp) 4.75 8.75 6.30 4.5bp)1. as promotions are still linked to firstname.lastname@example.org 6.80 5. the CNB would also likely cut rates if the CZK were to strengthen in coming months.50 4.56 0.75 0. with risks of a further delay.25 Oct-25-11 (+25bp) 8.50 4.75 5.00 4.25 4.93 5. owing to concerns about the passthrough to inflation and continued high exposure to foreign currency debt in CEE.00 3.50 3.40 4.25 4.53 7.25 1Q 2012 (+25bp) 3.85 6.75 4.50 3. Near-term rate cuts are most likely in countries where FX rates have been either stable or appreciated. the deteriorating inflation profile also raises risks of a 1-quarter delay in the rate cut to 1Q12. the fact that there are no alternative investment assets—these structural factors remain unchanged by the stabilization policies.50 5.875 2.50 4.75 3. which were the most aggressive hiking rates during the policy normalization process that started in early 2010. the FX intervention so far has been relatively timid and has not prevented a number of EM central banks from interrupting their tightening cycles by adopting an outright neutral or easing bias. we expect the government to maintain current policy stance in the real estate market to avoid another re-acceleration in housing prices.25 6. In South Africa.50 8.50 6. From a domestic political perspective.00 2.50 4.50 1.com Emerging Markets Research Emerging Markets Outlook and Strategy October 4.875 1.50 10.63 0.75 6.00 4.00 2. Our new forecasts now call for cumulative cuts by mid2012 of 150bp in Brazil.63 Emerging 5.25 3.80 5.24 4.50 4. are expected to cut rates the most over the next three quarters.50 On hold 4.76 5.50 3.75 4.00 4.50 3. This worry is most acute in Hungary where we are pushing back our forecast for a rate cut by a quarter to 2Q12. and these measures seem to come into effect.93 email@example.com 4. Although not our base case.875 1. 2011 stabilize the housing market.00 5.25 3.02 6. Looking forward.50 0 Dec-2-11 (-25bp) 4. supported by the urbanization process.14 Brazil Chile Colombia Mexico Peru EMEA EM Czech Rep Hungary Israel Poland Romania Russia South Africa Turkey EM Asia China Korea Indonesia India Malaysia Philippines Taiwan Thailand 8.
the October rate hike may not mark the end of the cycle in India.462 1.425 1.753 1.375 1.04 1. We recommend overweights in defensive low-beta where value now looks outright attractive and high spread overweights with idiosyncratic reasons to tighten.354 1. Table 11 shows that only Venezuela/PDVSA and Belarus have yields above 15% in the EMBIG and we remain overweight Venezuela / PDVSA given wide spreads that we feel do not price in the potential for political upside in the 2012 elections.40 17.29 18. We revise higher our year-end EMBIG spread target to 425bp (from 375bp). if inflation and inflation expectations in India do not show substantial moderation in the coming months.65% due 25 Stripped YTM Stripped Spread 19.667 1. and. Morgan Securities Ltd. Colombia. where a drop in headline inflation and a promise to keep subsidized fuel prices unchanged even in 2012 should give BI headroom for a 25bp cut early next year.60 15. EMBIG spreads peaked at 891bp in October 2008 but we do not expect spreads to get close to that over the next three months. the majority are in Latin America.417 1. including China. which markets previously considered safe (given very low spreads) and have sold-off significantly.16 15. We have revised our EMBIG spread forecast higher by 100bp since August but this has still not been enough to keep up with market moves.63 15.95% due 18 VE Republic 8 1/4% due 24 VE Republic 9 1/4% due 28 VE Republic 7 3/4% due 19 VE Republic 7% due 18 VE Republic 9 1/4% due 27 VE Republic 9 3/8% due 34 VE Republic 7.57 15. 2) previously ‘very low spread’ bonds with strong fundamentals and technicals that have widened significantly. We also highlight bonds.431 1.318 Source: J.45 16.387 1.457 1. We remain overweight Colombia and the Philippines from these countries. Spread widening and outflows (risk reduction) over the last few weeks have started to lay the conditions for re-entry points to the market that were previously lacking. but momentum suggests it is still too early to add despite our still positive EM growth forecast for the next year.02 15.553 1. Not surprisingly. Jonny GouldenAC (44-20) 7325-9582 jonathan.70 17. Even though the market continues to price in rate cuts in India. Table 12 shows bonds which traded below 120bp on August 1 (before EM spreads started widening) and where spreads have widened over 50% since then.41 15. EMBIG: Momentum points to likely wider spreads in the short-term Given the strong cashflows and low financing needs for EM sovereigns. Table 11: Only Venezuela/PDVSA and Belarus have yields above 15% in the EMBIG Issuer PDVSA PDVSA Belarus PDVSA Venezuela Venezuela Venezuela Belarus Venezuela Venezuela Venezuela Venezuela Venezuela Venezuela Venezuela Instrument VE PDVSA 8 1/2% due 17 VE PDVSA 12 3/4% due 22 BY Republic 8 3/4% due 15 VE PDVSA 5 1/4% due 17 VE Republic 12 3/4% due 22 VE Republic 11. the RBI is likely to stick to its script and deliver another rate hike at the end of this month.841 1. the majority of the countries are expected to remain on hold. With EMBIG spreads having widened 107bp over the last month alone and meaningful outflows just starting to been seen in the weekly data. and defensive low-beta Philippines and Colombia added last month as overweights. Mexico and Panama. Our EMBIG Model Portfolio recommendations are still defensively positioned with an overweight in Latin America versus EMEA EM.m. including Brazil.com Emerging Markets Research Emerging Markets Outlook and Strategy October 4.96 18. with our Bank of Korea rate hike call pushed back into 2012.P. we would see a large move wider on global market risk aversion as a potential re-entry point into EM sovereigns which we expect will be a more resilient part of EM fixed income.71 15. As spreads approach wider levels we look at two sources of value: 1) EMBIG bonds with yields above 15%. given markets are much more expectant of large sell-offs now (following the 2008/2009 experience) and technicals for EM sovereigns are steadier with less risk in trading hands and much lower leverage. The only in the country in EM Asia expected to lower rates is Indonesia.03 16. supply is flat and positioning is not firstname.lastname@example.org 1. 2011 The only central bank in EM Asia that we expect will continue to raise policy rates in the next three months is India. Elsewhere in the region. an underweight in quasisovereigns. we see wider spreads possible in the short term but expect some retracement by year-end as investors come back to buy a market where fundamentals are still strong. Morgan 15 . Indeed.68 15.95% due 31 VE Republic 9% due 23 BY Republic 8.321 1.J.P. with the Philippines and South Africa standing out for Asia and EMEA EM.
033 26.217 4.031 38.P.433 5. AUM against the benchmark currently stands at just 7.619 17.737 17.732 13.893 15. with only US$17. For the remainder of the year compared to US$31 billion of cash flows combined.P.138 40.054 49.4 billion) estimated for the remainder of the year (table 13).505 14.636 8.072 19.437 Forecast 2012 108.J.com Emerging Markets Research Emerging Markets Outlook and Strategy October 4. September 28. While we have witnessed a significant growth in institutionally backed CEMBI funds in the last two years.430 4. The change in our supply forecast. We revise our year-end targets for CEMBI Broad and corporate supply to 525bp (implying 380bp for IG and 975bp for HY) and US$175 billion.429 6.006 31. In that report we warned that while default and refinancing risks are much lower in EM corporates.138 22.335 11.519 49. We said as much in the note we published on Tuesday.698 14.057 21.893 29. dedicated investors have not been large enough to counter the selling pressure 16 Eurobond Cash flows Total cash flows Investment grade High yield of which total maturities Investment grade High yield of which total coupons Investment grade High yield Total cash flows Asia Emerging Europe Latin America Middle East and Africa of which total maturities Asia Emerging Europe Latin America Middle East & Africa of which total coupons Asia Emerging Europe Latin America Middle East and Africa Source: J.057 11. This view appears to be substantiated by the 73bp widening in CEMBI spreads in the third week of September and the coincidental EPFR data which pointed to acceleration in investment outflows from US and Western European-domiciled EM mutual funds over the same period.j.775 17.425 6.293 37. Although the financing constraints imposed upon corporates at this juncture is far from ideal. respectively.031 70.881 6. 2011 entitled Putting Recent Market Moves in Context.461 . today versus email@example.com 20. However.530 17.098 1.5% (or US$30 billion) of the US$400+ billion market cap index. Morgan Securities LLC Warren MarAC (1-212) 834-4274 warren.6 billion of Eurobond maturities.320 9.757 3.460 1. Table 13: Estimated EM corporate Eurobond cash flows for remainder 2011 and 2012 EM corporates: The virtuous cycle of a negative feedback loop The extent of the reversal in the inflow story for EM corporates and not fundamentals will determine peak spreads for the asset class this crisis. challenges presented by poor liquidity and weak sponsorship would likely continue to undermine valuations and see spreads overshoot to the downside in the near term.567 5.627 13. 2011 Table 12: Bonds that traded below 120bp on August 1 and where spreads have widened over 50% since then Bond BR A bond BR Republic 10 1/4% due 13 BR Republic 10 1/2% due 14 BR Republic 7 7/8% due 15 BR Republic 6% due 17 BR Republic 4 7/8% due 21 BR Republic 5 5/8% due 41 BR Republic 5 7/8% due 19 BR Republic 8 7/8% due 19 CO Republic 10 3/4% due 13 CO Republic 8 1/4% due 14 CO Republic 7 3/8% due 19 CO Republic 7 3/8% due 17 MX UMS 6 3/8% due 13 MX UMS 8% due 22 MX UMS 5 7/8% due 14 MX UMS 5 7/8% due 02/14 MX UMS 6 5/8% due 15 PA Republic 5. Morgan and Bond Radar Remainder 2011 31.627 7.202 3.411 24.P.895 3.430 7.338 13.738 58.332 4.2% due 20 PH Republic 9% due 13 PH Republic 8 1/4% due 14 PH Republic 4% due 21 ZA Republic 6 1/2% due 14 Source: J. On the institutional side. recognizes the current challenges facing issuers and the expectation that market access will be restricted to the better known quasi-sovereign and investment grade names that will return to the market as soon as conditions allow. EM refinancing pressures remain low with EM corporates having front loaded much of their financing needs into the 1H11 and built up sufficient liquidity through operations to meet the US$17. we get a sense from talking to dedicated EM money managers that they have been more tolerant of this sell-off. which implies around US$20 billion left to do this year.219 108. Morgan Initial Spread (bp) 28 24 57 89 98 104 107 109 109 50 103 114 118 56 74 79 96 108 115 89 115 117 120 Current Spread (bp) 117 97 115 177 197 218 237 200 210 87 188 221 221 118 164 197 198 195 218 157 197 229 183 % chg bp chg 321% 297% 101% 99% 102% 110% 121% 84% 92% 74% 81% 94% 88% 110% 123% 150% 106% 79% 90% 76% 70% 96% 52% 89 72 58 88 99 114 130 91 101 37 84 107 104 62 90 118 102 86 103 68 81 113 63 coming from retail and marginal crossover buyers now seen to be retreating more aggressively back to traditional benchmarks and EM sovereigns. Retail investors may also continue to sell.515 58.6 billion of Eurobond maturities (compared with coupon inflows of US$13.
471 1.01 19.336 1.81 24.00 88.J.25 69.00 74.00 84.00 84.00 81.00 84.499 1.00 YTW 15.51 47.00 90.94 19.62 25.00 17.61 17.198 1.456 1.731 1.50 66.83 1.67 15.818 1.362 1.00 70.25 24.20 16. Morgan first including higher quality and rated names already trading at a yield between 7-8%.59 18.95 16.99 18.P.00 57. The list is broken into two buckets.17 14.830 1.00 70.00 43.371 2.00 16.598 1.394 4.j.50 78.50 69.00 71.00 71.428 1. the Table 14a: EM corporates offering longer term value Bonds with a yield greater than 15% Issue Asia Agile 10% due 16 Agile 8 7/8% due 17 Bakrie Telecom 11 1/2% due 15 BLT Finance 7 1/2% due 14 Country Garden 11 3/4% due 14 Country Garden 10 1/2% due 15 Country Garden 11 1/4% due 17 Country Garden 11 1/8% due 18 Evergrande 13% due 15 Hidili Industry 8 5/8% due 15 Kaisa Group Ltd 13 1/2% due 15 Lai Fung 9 1/8% due 14 Longfor 9 1/2% due 16 Lonking 8 1/2% due 16 PT Gajah Tunggal Step-up due 14 Road King 7 5/8% due 14 Road King 9 1/2% due 15 West China Cement 7 1/2% due 16 Latin America Cemex 9 1/2% due 16 Cemex 9 1/4% due 20 Cemex 9% due 18 Cemex FRN due 15 Marfrig Holding Europe 8 3/8% due 18 Marfrig Overseas 9 1/2% due 20 Maxtel 11% due 14 Minerva Overseas 10 7/8% due 19 PDVSA 12 3/4% due 22 PDVSA 4.00 72.964 UAE UAE Real Estate Real Estate B3/NR B3/B+ 95.84 16.15 15.491 2.33 17.26 18.819 2.06 1.89 18.00 70.83 15.986 1.18 16.00 90.749 1.649 1.00 81.33 20.473 1.445 1.414 Mexico Mexico Mexico Mexico Brazil Brazil Mexico Brazil Venezuela Venezuela Venezuela Venezuela Venezuela Venezuela Argentina Panama Industrial Industrial Industrial Industrial Consumer Consumer TMT Consumer Oil & Gas Oil & Gas Oil & Gas Oil & Gas Oil & Gas Oil & Gas Utilities Real Estate NA/B NA/NA NA/B NA/B B1/B+ B1/B+ Caa1/CCC+ B2/B NA/NA NA/NA NA/B+ NA/NA NA/NA NA/B+ NA/NA B3/NA 76.00 61. Morgan Securities LLC Warren MarAC (1-212) 834-4274 warren.00 66.47 16. Country China China Indonesia Indonesia China China China China China China China China China China Indonesia China China China Sector Real Estate Real Estate TMT Transport Real Estate Real Estate Real Estate Real Estate Real Estate Metals & Mining Real Estate Real Estate Real Estate Industrial Industrial Infrastructure Infrastructure Industrial Ratings Ba2/BB Ba2/BB NR/B NR/CCC Ba3/BBBa3/BBBa3/BBBa3/BBB2/BBB1/BBB2/B B1/B+ Ba3/BB Ba3/BB B3/NR Ba3/BBNR/BBBa3/BB- Ask Price 81.9% due 14 PDVSA 5 1/4% due 17 PDVSA 5 1/8% due 16 PDVSA 5% due 15 PDVSA 8 1/2% due 17 TGNOAR Step-up due 12 Trump Ocean Club 9 1/2% due 14 Middle East and Africa Dubai Holding Com FRN due 12 Dubai Sukuk Centre FRN due 12 Source: J.00 83.18 29.00 73.00 16.704 1.545 firstname.lastname@example.org 58.760 1.92 SOT to worst 1.550 1.50 55.54 14.45 14.332 1.395 2.435 1.00 77.55 15.P.00 85.700 17 .com Emerging Markets Research Emerging Markets Outlook and Strategy October 4.06 14. and lower rated names already trading at a yield above 15%.716 1.605 2.14 19. table 14 highlights the names that we believe already offer longer-term value.34 14.50 67.00 68.63 26. 2011 We do see clear value emerging in EM corporates.41 22.519 1.892 2.00 72.00 77.575 1.
03 8. The best opportunities to add duration may be in Latin America in the coming weeks.69 7.25 7.00 93.32 7.50 104.50 97.04 8.10 102.00 101. Morgan Country China Indonesia Hong Kong Indonesia Hong Kong Indonesia Kazakhstan Russia Russia Russia Mexico Chile Brazil Peru Brazil Mexico Mexico Peru Peru Brazil Brazil Mexico Mexico Brazil Jamaica Brazil Brazil Mexico Mexico Brazil Peru Mexico Brazil Brazil El Salvador Mexico Mexico Brazil Brazil Mexico Brazil Argentina UAE Sector Diversified Utilities Diversified TMT Diversified Metals & Mining Financial Oil & Gas Financial TMT TMT Consumer Financial Financial Financial Financial Financial Financial Financial Industrial Industrial Consumer Real Estate Consumer TMT Pulp & Paper Pulp & Paper Industrial Real Estate Consumer Financial Consumer Industrial Consumer TMT TMT TMT Diversified Financial Real Estate Diversified Oil & Gas Utilities Ratings Baa1/ABa2/BBNR/NR Ba1/BB Baa3/BBBBa1/NR Baa3/BBB Baa2/BBBNR/BBB Ba3/BB B1/B+ Ba1/NR Ba1/NR Ba3/NR Ba3/NR A3/NR A2/NR Baa3/NR NR/BB+ Baa3/BBBBaa3/BBBBa3/NR Ba3/BBBa2 /BB B1/NR Ba1/BB Ba1/BB NR/BB Ba3/BBBa2/BBBa3/BBNR/BBBB1/BBNR/BBB1/NR B2/B+ B2/B+ Baa3/BB+ Baa1/NR Ba3/B+ Baa3/BBB NR/NR Ba2/NR Ask Price 91.P.P. Morgan Securities LLC Holly HuffmanAC (1-212) 834-4953 holly.00 96.19 7. we recommend being short 10-year bonds in the former and 5-year bonds in the latter.50 106.50 100. the slow growth and low-for-long policy of the 18 .59 7. and we would expect this backstop bid to materialize at higher yield levels.00 101.68 7.80 7.00 99. is strong domestic support for many local markets. We are cautious on EM Asian local bonds as well.00 100.00 100.10 7. stand out as being most susceptible to outflows (South Africa) and underperformance (Hungary).05 7.26 7.64 7.00 102. particularly where foreign holdings are high relative to recent periods and where positions are long.50 96. in general.35 7. and South Africa and Hungary.62 7.59 8.09 7.00 112.50 8.00 102.00 96. EMEA EM.50 7. 2011 Table 14b: Bonds with a yield between 7-9% Issue Asia Beijing Enterprises 6 3/8% due 41 Cikarang 9 1/4% due 15 Hutchison 6 5/8% due 15 Perp Indosat 7 3/8% due 20 Noble 6 3/4% due 20 PT Adaro 7 5/8% due 19 Emerging Europe Dev Bank of Kazakhstan 5 1/2% due 15 Lukoil 6 1/8% due 20 VEB Finance 6.50 97.54 7.J. If FX rates and general market volatility stabilize.P.91 7. in particular.j.04 8.49 8.00 95.00 89.50 101.94 8. Morgan Securities LLC Warren MarAC (1-212) 834-4274 warren.67 7.com J.00 7.90 6.50 102.46 6.73 7. stay max short EM FX We recommend bearish positions in several local bond markets.72 email@example.com 8.00 106.00 99.02 8.00 93.25 99.38 94.84 SOT to worst 406 769 404 551 660 620 585 525 516 648 664 670 728 654 583 564 546 488 579 469 431 656 808 527 795 655 620 752 711 562 640 587 634 725 703 639 558 426 715 728 461 626 605 Local market bonds remain vulnerable to further position reduction.14 8.70 9.98 8. One key differentiating factor in Asia.com Emerging Markets Research Emerging Markets Outlook and Strategy October 4.14 7.00 YTW 7.902% due 20 Vimpelcom 8 3/8% due 13 Latin America Alestra 11 3/4% due 14 Auto Gil 8 1/4% due 21 Banco ABC 7 7/8% due 20 Banco Internac 8 1/2% due 70 Banco Panamericano 8 1/2% due 20 Bbva Bancomer 7 1/4% due 20 Bbva Bancomer 6 1/2% due 21 BCP 6 7/8% due 26 BCP Var 9 3/4% due 69 Braskem 7 1/8% due 41 Braskem 7 3/8% due 15 Perp Commex 7% due 18 Corp GEO 8 7/8% due 14 Cosan 8 1/4% due 15 Perp Digicel 8 1/4% due 17 Fibria Overseas 7 1/2% due 20 Fibria Overseas 6 3/4% due 21 Grupo Petrotemex 9 1/2% due 14 Homex 7 1/2% due 15 Hypermarcas 6 1/2% due 21 IFH Peru Ltd 8 5/8% due 19 Mabe 7 7/8% due 19 Magnes 7 7/8% due 20 Malls Intl Fin 8 1/2% due 16 Perp MICC 8% due 17 Nii Capital Corp 8 7/8% due 19 Nii Capital Corp 7 5/8% due 21 Odebrecht 7 1/2% due 15 Perp Unibanco 8.00 114.42 7.00 103.91 8.00 93.00 102.05 6.25 8. as foreigners’ selling is likely to remain the dominant factor in the near term.s.50 112.53 7.50 91.00 firstname.lastname@example.org 96.88 100.7% due 10 Perp Urbimm 8 1/2% due 16 Votorantim 7 1/4% due 41 YPF 10% due 28 Middle East and Africa DEWAAE 7 3/8% due 20 Source: J.25 105.35 91. though.00 96.00 93.50 98.60 7.42 6.
49% 5.8% -3.15% 4. for real money investors.4% 2.7% 7.20 7.7% -0.6% 8. meanwhile.5% -5.41% 526 1961 14.3 1821 13.5% -14.8% 2.35 8.2% 1.0 3.5% 8.3 14.6994 10. The depreciation of many currencies has been greater than declines in cyclical drivers would suggest.6% 4.0 526 223 32.P.54% 475.8% 0.5% 5.75 2.55 130.30 Spot Return to Year-end 2.31 1.J.5% 16.8% -12.9% 4.0 44.91% 5.40% 8.3% 0.8% 6.0288 6.75% 5.0 10.29 7.0% YTD -3.7% 5.12 141. This is particularly the case for Brazil.8% 6.3% 4.0 11.85% 4. we recommend neutral duration allocations in Asia and neutral duration allocations in Latin America.8% email@example.com% -0.4% 2.78 3.80 1900 29. Morgan Entry date 8-Aug-11 12-Jul-11 20-Sep-11 13-Sep-11 3-Oct-11 13-Sep-11 13-Sep-11 27-Sep-11 27-Sep-11 13-Sep-11 13-Sep-11 13-Sep-11 13-Sep-11 13-Sep-11 Latest 1.4% -1. We also update our currency and GBI-EM yield forecasts in table 16.4% -4. However.205 10.1% 3.0% Spot Current Forecast 9.7% 6.20% 460 1765 15.9% 7.8% 2.9% 1. Further. is likely to prevent EM FX from rebounding meaningfully.P. 2011 Table 15: Top local markets trades Trade TWD/THB 2-month NDF USD/CNY 3-month NDF Long TRY/ZAR Short ZAR 10-year (R208) Short HUF 5-year (16/c) Long USD/CLP Long USD/COP Short CAD/MXN Long MXN/COP Long USD/ARS Sell Dec 14/Buy Mar 14 NDF Receive Brazil Jan ’14s Receive Chile 2-year Swap Receive Mexico 5-year TIIE swaps Receive Colombia 2-year IBR Source: J.466 4.2% 1. Morgan expectations from now to year-end Country GGBI-EM Global Div Indonesia Peru Malaysia Brazil Colombia Thailand Mexico Philipines Chile Hungary Russia Poland Turkey South Africa Forecast Return Est.4% -20% Source: J. Our top trades across EM local markets are highlighted in the table 15.2% -0.2% 3.3% 2.31% 7. 2011 0.2% 5. downward pressure on EM terms of trade drivers.5085/4.3% 3.7% 3.4% 5.83% 5. with an emphasis on linkers.0340 6.928 2.2% -4.4% 6.3% -2.8% 7.396 4. where the onset of an easing cycle and relatively low vulnerability to foreigner selling should make the market attractive if risk sentiment improves. For similar reasons. notably for the MXN and some EM Asian FX.4% -16.4% 1.530 4.7% 3.70% 7.8% 6.62% 5.75% Target 1.10% 4.5% 0.7% 7.8% 8.com Emerging Markets Research Emerging Markets Outlook and Strategy October 4. in EMEA EM.7% 1.0% 3.4% 1. In aggregate.7% 10.9% 9.2% -0.50 8.6% 10.25% Stop 1.00% 550 2000 12.5% 6.50% 3.33 1.4% 8.3 41.000 2.94% 4.4% -15.1% -6.18 8.2% 5. we continue to recommend maximum short EM FX allocations versus the GBI-EM index (10%).9% 7. Morgan Securities LLC Holly HuffmanAC (1-212) 834-4953 holly. notably commodities.7% -5.56% 4.6 3.3% 6.3% 11.7% 7.0% -1.2% 6.9% 0.50 155.89 1961 31.9% -1.4% 8.5% -4.5% -1. Morgan -10% 0% 10% 20% 19 .88 8.98 1.90% Entry 1.20 1.72% 4.00% Fed and other central banks should push some investors back into the market.5 13.30% 7.s.0065 6.0510 6. While central banks are well prepared with strong balance sheets to stem further FX Table16: GBI-EM returns and forecasts through year-end Dark bars are year-to-date returns.88 8.1% 1.9% 3.7% 3.9% 5.66 140.9% 3.8% 6.1 4.4% 5.8 500 221 33.2% 6. lighter bars are J.350 4. as slower growth takes hold heading into 2012. We are short duration. currencies remain the more liquid adjustment valve for investors to hedge bond positions which face liquidity constraints.P.0% -1.5 4.4% -1.6% Yield Local Return Current Forecast to Year-end 6.P.5% 5.9% 5.
Indeed. therefore.0 -15. In the near term. We also continue to recommend outright short trades where we see the highest probability of further outflows in local bonds. Notably.0 5. Chart 14: ADXY synchronized to growth cycle %oya both scales 10. We minimize outright USD/Asia risks. and conservative fiscal stance. and advise seeking long SGD exposures only on a basket basis and only if the SGD NEER trades down to the intervention level of the band (-2% band level by our estimates). The 5% depreciation of the ADXY at the peak of the move is almost equivalent to the full-year depreciation in the sharp recession of 2000. we avoid over-emphasizing long-term directional or fundamental views while financial markets are clearly distressed. THB. central bank intervention is now an important offset. As such.0 -10.US growth differential ADXY %oya -15% -20% -25% Feb-98 Feb-02 Feb-06 Feb-10 20 .0 -5. We took profits in long PLN/HUF and look for both to underperform versus USD. Particularly. Morgan However.P. we believe that bond markets such as Indonesia. a position which we have held since August 9. and this has effectively taken out the year-to-date appreciation in EM Asia.j. recent moves in the region have started to reflect the relative intervention biases of Asian central banks. IDR) have traded with relative resilience. focusing instead on defensive positions to ride out volatile times. INR)..gochet@jpmorgan. In contrast. But we fear that Asian government bonds will eventually have to suffer when foreign investors reduce their local bond holdings. and we continue to recommend a maximum short (10%) allocation versus the GBI-EM GD index. staying short only in markets where the directional trend remains intact: short USD/CNY as we continue to see records low in the daily fixings.e. such as declining inflation.0 0. while ADXY appears oversold relative to a cyclical slowdown. we expect twosided volatility on USD/Asia to stay high with intervention biases influencing relative performances within the region. Hong Kong Bert GochetAC (852) 2800-8325 bert. which continues to benefit from carry and THB stability. Risks are skewed to further underperformance broadly. most notably in ZAR. we stay in defensive intra-Asia crosses for carry or for relative intervention biases between central banks. THB should remain resilient as it remains a laggard in EM Asia. and the BoT has been active in capping USD/THB upside. So.A.P. when we increased short exposure from 5% to 10%. Malaysia and Korea are vulnerable to a further correction despite bond-positive fundamentals. EM Asia: Reduce directional risk but hold short USD/CNY and short TWD/THB Asia FX has capitulated as the anchor from growth expectations eroded away. Morgan ADXY index of EM Asia FX. declining growth. higher yields). central banks in many markets are now offering USD in substantial size. We stay short TWD/THB. We exit outright short USD/SGD. we minimize outright directional risks in USD/Asia. though we continue to see upside in CNY versus USD despite recent headwinds and increased risks from the policy side. wait for better levels to position in Asian bonds for the time being. we recently took profits on long USD/BRL but hold short exposure to the region via long USD/COP and USD/CLP which have lagged.com Emerging Markets Research Emerging Markets Outlook and Strategy October 4.JPMorgan Chase Bank N. fear of financial system crisis (even if not our base scenario) may take the market to deeper oversold levels (chart 14). We continue to like short TWD funding for carry and in view of a central bank that is expected to remain resistant to currency appreciation. Though this suggests that a sharp economic slowdown is already priced. Currencies where policymakers are active sellers of USD (PHP. In Latin America. In Asia FX. We close our long-held overweight SGD trade. J. 10% 5% 0% -5% -10% Asia . In this environment. while currencies with less or no intervention have seen more violent unwinds (SGD. governments broadly have shown comfort with the directional moves in currencies. In local rates markets. Central banks. having bought USD into the USD/Asia fall.0 Feb-94 Source: J. trading has been mostly sideways in recent weeks as cyclical factors (for lower yields) have offset the impact of some outflows so far (i.. now have significant capacity to buffer the USD/Asia rise. sold off violently on a position unwind as confidence in the growth cycle turned. The September selloff has been the largest since early-2009. markets continue to price in risk premia of a crisis or a funding crunch on the scale of Sept-2008. but they will not underwrite the exodus of foreign money out of their markets without asking for concessions. We will. 2011 volatility. Local investors would be buyerson-dips at current levels.
We also have exited a long position in INDOGB. Turkey has come the closest to drawing a line in the sand for the lira.j. although the market is right to price in rate hikes in Hungary as a response to the weaker currency. The appetite of the NBH to use reserves to defend the HUF may be limited compared with other central banks since FX reserves may need to be used to pay down maturing FX debts. Deteriorating growth and fiscal dynamics will continue to weigh on South Africa assets as credit premia is priced in. is the key here.J.P. We are bearish on HUF FX and rates due to weak fundamentals. 2011 In Asian rates. and our trade recommendations reflect this. The CBRT’s daily USD selling auctions amounted to US$1. which has corrected by more than 16% since May. Assuming the NBH's scenario of a 20% participation rate. or both.com Emerging Markets Research Emerging Markets Outlook and Strategy October 4. Hungary has adopted a less direct approach to FX intervention. Positions are relatively light in both rates and FX markets and central banks here have been stepping up their intervention strategies. more than US$6 billion in September. These markets also benefit better fiscal positions (once parastatal debt has been taken into account in South Africa) or better growth outlooks. with much of the move taking place in September.85 billion in additional local bank demand for FX. In South Africa. In addition. We exit a curve flattener in KRW. Michael TrounceAC (44-20) 7777-4356 michael. where positions are crowded. Turkey.e. 2011 and February 29. These weekly EUR auctions will be conducted between October 3. but the willingness and ability of policymakers to act to lean against the wind to smooth volatility. it is now acting effectively through reserve drawdown to halt the lira’s fall and maintain credibility over the inflation profile. In Russia. we expect negative total returns) and we see greater pressure on markets where the growth outlook has been taken down further. the weakening in monetary conditions is—for now—tolerable and will act as counter-cyclical support. they are focusing on containing volatility— leaning against the wind—rather than drawing a line in the sand. However the uncertainties surrounding this plan suggest that NBH will likely hike rates if HUF depreciation continues at the current pace. South Africa has the greatest potential for deeper outflows. as the risk that Indonesian yields rise from here remains real. any support from policy rate cuts is more unlikely now given the significant depreciation of the currency. Our latest growth forecasts cut back most strongly the outlook for 2012 in Hungary. EMEA EM: Most vulnerable to outflows risk. choosing to offset any local bank demand for FX which is likely to materialize from the new FX loan plan against their FX reserves.7 billion in September. In addition. 2012. amounting to the equivalent of FX intervention. interest rate expectations fell and short rates rallied.trounce@jpmorgan. coupled with smaller positions. although Hungary may be the exception. As growth and inflation forecasts were taken down during August in response to the cyclical slowdown. Morgan Securities Ltd.We believe that central banks will resort to FX intervention over rate hikes. Israel and Czech are the least vulnerable markets. EMEA EM central banks have to a varying extent markedly stepped up their response to cyclically weaker FX markets. we estimate that there could be as much as EUR3. stay short South Africa bonds and favor Poland versus Hungary The ongoing downward revisions in growth forecasts will continue to place modest further negative pressure on EMEA EM FX. The market is pricing in the expectation that once again that interest rates will serve as the main adjustment channel. We continue to expect the ELMI+ subindices for EMEA EM currencies to fall (i. Turkey stands out as having the most aggressive intervention strategy in the region. Likewise in Poland. The consequent weakening in EMEA EM FX has been viewed differently across EM central banks. Outflows from South Africa local bonds are also likely to intensify as real money funds meet redemptions by selling assets given low cash levels. verbal intervention has been frequent and explicit with the central bank governor making it quite clear last week that further TRY depreciation would be “undesirable”. Further. 21 . we keep Hungary in the bottom tier of EMEA EM FX markets long with South Africa. we think positions are still relatively overweight. Poland. where we were long 10-year KTB versus paid in 2-year swaps. the NBP has for only the second time in ten years resorted to intervention in order to dampen excess volatility.. the RUB weakness has passed the tipping point and intervention has returned in force. despite the authorities’ interventions in both the FX and the bond market. Even after the late September moves (seven consecutive large outflow days and ZAR 15 billion of bond outflows). Hungary. we keep risk light. potentially fueling further rand weakness. the largest on record. and Romania. with lower foreign participation. having effectively achieved a significant—even relative to other EM currencies—depreciation in the November-May period.
While the timing is uncertain. The yield curve in Brazil is relatively flat between 2s5s. Official intervention in the past has been reactive to market liquidity conditions and the pace of the depreciation (or volatility). where foreigners own over 40% of the stock outstanding. In Brazil. That said.the goal to cap imported price pressures as well as limit excess speculation and currency volatility. we see the 5-year outperforming (as it did in the US before QE2 and from March 2011 to date). of which US$16 billion was built in 2011 alone. Brazil and Mexico may steer clear of counter-cyclical fiscal policies and instead ease monetary conditions as the first line of defense from a global recession. 2011 The NBP has been particularly active in the FX market in recent weeks. in Argentina.P. sell 2-month versus buy 6-month USD/ARS. which may prompt some intervention if the overshooting persists. While these currencies remain vulnerable to further correction. as the FX is seen as buffer in a global economic downshift. In our view. The BCB holds over US$ 350 billion in international reserves. We expect the intensity of NBP intervention to moderate while increased risks for a rate hike in Hungary may help to strengthen HUF.com J. the shape of the curve gives the 2-year the most upside in a full-blown recession. ARS has lagged the sell-off as presidential elections are approaching on October 23. Morgan Securities Ltd. foreign investors hold around US$125 billion in local bonds. Their holdings are around US$50 billion. Central Banks in Latin America have strengthened their balance sheets since the 2008 crisis. especially for countries that not long ago were trying to fend off appreciation pressures. or 12% of local debt. as market participants seem to believe that a front-loaded easing cycle will need to be reversed in a 12-month horizon. Central banks that have been cheering the role of floating exchange rate regimes in providing a buffer amid a global crisis have also become more vocal about potential overreactions in the FX markets. the rapid expansion of BRL-overlay funds since 2Q09 adds another layer of risk to the BRL (current AUM is just below US$40 billion). Verbal intervention has also been frequent from both the central bank and the Ministry of Finance with . Some depreciation has been welcome in most of the region.20 level in check. Positions are mostly concentrated in the long-end (F17 and F21).trounce@jpmorgan. In Latin America. The NDF trade tames the carry cost and should perform well (the curve should steepen) in a scenario in which the government tries to hold the peso steady amid continued correction in broader EM FX. we believe it is inevitable that the government will let the ARS adjust given the sharp depreciation of the currencies of Argentina’s main trading partners (Brazil in particular). The steepening of the Mexican curve and the sound fiscal numbers may limit the selling of Mbonos. In Latin America. Brazil has intervened through swaps. Latin America: Best opportunities to add duration. Michael TrounceAC (44-20) 7777-4356 michael. and Chilean officials recently stated that the USD purchase operations could be terminated.j.com Emerging Markets Research Emerging Markets Outlook and Strategy October 4. 22 . with a substantial increase of international reserves in the period.P.J.90 level. BRL and MXN volatility to subside. The NBP’s strategy has proven effective with the currency appreciating over 2% since midSeptember. In addition. A strong central bank balance sheet and the potential unwinding of macroprudential measures provide a silver lining in a scenario of global recession. the 5-year to 10-year sector of the local bond curves in Brazil and Mexico are heavily owned by international investors. Argentina BCRA has been the most aggressive central bank in the region as it has sold USD through spot and futures market (US$2 billion total according to J. we see less room for them to play the role of the higher beta in a sell-off scenario. receive 2-year (Jan14s) in Brazil and 5-year TIIE in Mexico. Morgan Securities LLC Felipe PianettiAC (1-212) 834-4043 felipe. but forced selling (driven by redemptions) is a risk to monitor. especially with the currency trading near 14. As the scenario for low for long becomes a base case. a result of hefty positioning by international investors. directly intervening to support the currency in mid September (for the first time in 10 years) and on several occasions since then. Argentina was the only exception. prompting us to take profits on our PLN versus HUF relative value trade. we still retain a preference for PLN over in HUF in our model portfolio given Poland’s healthy growth and fiscal outlook and resilient flow momentum. when the USD/BRL breached the 1. but ARS to play catch up The BRL and the MXN were the worst performers among major currencies over the past month. A key risk to monitor is the behavior of Japanese investors as the BRL/JPY cross trends lower. Morgan estimates) to keep the USD/ARS 4.pianetti@jpmorgan. and the government could remove the IOF on financial transactions at will.q. International investors own 40% of the stock of Mbonos outstanding and 58% of the 5-year to 10-year bucket. the IRS curve remains steep in Mexico as participants have not factored in the recession risks for 2012. Meanwhile.P.
O/L Stable Upgrade. Affirmed Upgrade. O/L stable Moody’s Rating View Argentina Barbados Belize Bolivia Brazil Chile Colombia Costa Rica* Cuba B3 Baa3 B3 B1 Baa2 Aa3 Baa3 Baa3 Caa1 (+) (+) (-) S&P Rating View B BBBBB+ BBBA+ BBBBB NR B+ BBBBB B BBBB NR (-) (+) (+) (+) (+) (+) Fitch Rating View B NR NR B+ BBB A+ BBBBB+ NR B BBB BB+ NR BBBB NR (+) BBB NR BBBNR BB+ B+ (+) (+) Recent Moody’s Action Action O/L chngd to stable O/L chngd to (-). O/L stable Affirmed. O/L stable Upgrade. O/L (+) Upgrade. Affirmed Oct-28-10 Affirmed. O/L stable O/L chngd to stable. 2011 Asia and Latin America Credit Ratings Moody’s Rating View China Fiji Islands Hong Kong India Indonesia Korea Malaysia Pakistan Philippines Singapore Sri Lanka Taiwan Thailand Turkmenistan Vietnam Aa3 B1 Aa1 Baa3 Ba1 A1 A3 B3 Ba2 Aaa B1 Aa3 Baa1 B2 B2 (+) (+) (-) (+) S&P Rating View AAB AAA BBBBB+ A ABBB AAA B+ AABBB+ NR B+ (+) (+) Fitch Rating View A+ NR AA+ BBBBB+ A+ ANR BB+ AAA BBA+ BBB NR B+ (+) Recent Moody’s Action Action Upgrade. O/L stable Jun-02-11 Affirmed. O/L stable O/L chngd to (-).P. O/L stable O/L chngd to stable. O/L Stable Upgrade. Affirmed Affirmed. Affirmed Affirmed. O/L stable Affirmed. O/L stable O/L chngd to stable. O/L stable O/L chngd to (+).ray@jpmorgan. O/L stable Upgrade. O/L (+) Affirmed. O/L stable Affirmed. Affirmed Recent Fitch Action Action Affirmed. Affirmed Affirmed. O/L chngd to stable Mar-24-11 Upgrade. O/L stable Aug-19-11 Affirmed. O/L chngd to stable Apr-16-09 Withdrawn Feb-25-05 Apr-11-11 Downgrade. O/L stable O/L chngd to (+). O/L stable Upgrade. Affirmed Upgrade. O/L stable Jun-23-11 Apr-20-11 Jul-18-11 Nov-10-08 O/L chngd to stable. O/L stable Affirmed. O/L stable Affirmed. O/L stable Recent Fitch Action Action Affirmed. O/L (-) Affirmed. O/L stable Affirmed. O/L stable Jul-14-11 Apr-11-11 * S&P issue rating is one notch above the issuer credit rating See key on the following page for explanation of ratings terminology and procedures. O/L stable Recent S&P Action Action Affirmed. O/L (+) Affirmed. Affirmed Downgrade. O/L stable Affirmed. O/L stable Affirmed. O/L stable Jul-21-11 Aug-30-11 Aug-30-11 Jan-14-11 Jul-25-11 Aug-19-11 Upgrade. O/L stable Upgrade. O/L chngd to (+). O/L stable Affirmed. 23 . O/L stable Jun-01-10 Sep-29-98 Mar-02-10 Aug-18-11 May-26-10 Aug-04-11 Dec-02-10 Mar-21-11 Jul-13-06 Dec-08-10 Jan-15-09 BBBBBBBB A BB+ B+ O/L chngd to (+). O/L stable Affirmed. O/L stable Affirmed. O/L stable Upgrade.J. O/L stable Affirmed. O/L stable Upgrade. O/L stable Recent S&P Action Action Upgrade. O/L chngd to stable Affirmed. O/L stable O/L chngd to (+). Affirmed Upgrade. O/L stable Upgrade. O/L (+) Affirmed. O/L stable Upgrade. O/L stable Date Date Dec-16-10 Aug-04-11 Aug-02-11 Mar-18-10 Apr-08-11 Jan-12-10 Jul-27-11 Nov-15-10 Nov-12-10 Aug-25-11 Jul-19-11 Aug-02-11 Date Aug-18-11 Asia Nov-11-10 May-12-11 Sep-20-11 Jul-26-10 Feb-10-11 Apr-14-10 Dec-16-04 Nov-16-10 Jun-16-11 Jun-14-02 Jul-18-11 Aug-25-11 Affirmed. O/L stable Jun-13-11 Aug-04-11 Jan-14-11 Aug-02-11 Jun-14-11 Dec-22-10 Dec-17-10 Affirmed. O/L stable Assigned Upgrade. O/L stable Upgrade. O/L stable O/L chngd to (+).com Emerging Markets Research Emerging Markets Outlook and Strategy October 4. O/L stable Affirmed.t. O/L stable Affirmed. Affirmed Upgrade. O/L stable Oct-03-11 Jun-21-11 Feb-24-11 Nov-11-10 Aug-11-11 Upgrade. Affirmed Downgrade. O/L chngd to stable Affirmed. O/L stable Affirmed. O/L stable O/L chngd to (+). O/L (+) Jul-27-11 Trinidad & Tobago Baa1 Uruguay* Venezuela Ba1 B2 Upgrade. O/L stable Aug-13-01 Jan-15-09 Dec-09-10 Downgrade. O/L stable Upgrade. O/L stable Upgrade. O/L stable Oct-05-10 Apr-04-11 Sep-07-11 Jun-22-11 Mar-04-11 Dominican Republic B1 Ecuador El Salvador Guatemala Honduras Jamaica Mexico Nicaragua Panama Paraguay Peru Caa2 Ba2 Ba1 B2 B3 Baa1 B3 Baa3 B1 Baa3 (+) (+) Downgrade. O/L stable Affirmed. O/L stable Downgrade. O/L stable Upgrade. O/L stable CreditWatch (-) O/L chngd to (+). O/L stable Upgrade. O/L Stable Affirmed. O/L stable Affirmed. Morgan Securities LLC Tejal Ray (1-212) 834-8580 tejal. O/L stable Feb-08-11 Jan-12-11 O/L chngd to (+). Affirmed Affirmed. Affirmed Affirmed. Affirmed Affirmed. Affirmed O/L chngd to (+). O/L stable Upgrade. Affirmed Upgrade. O/L stable Upgrade. O/L stable Date Date Sep-12-11 May-03-11 Jun-21-11 Aug-22-11 May-23-01 Dec-16-10 Mar-16-11 Feb-07-11 Date Jul-22-11 Latin America Aug-14-08 Jun-13-11 Aug-04-11 Sep-08-11 Jun-20-11 Sep-08-11 May-31-11 Sep-08-11 Apr-05-99 Apr-22-10 Feb-01-11 Upgrade. Affirmed Upgrade. O/L stable O/L chngd to (+). O/L stable Upgrade. O/L stable Affirmed. O/L stable Affirmed. O/L chngd (+) Affirmed. O/L stable Jan-05-11 Nov-05-10 Jul-29-11 Aug-04-11 Upgrade.
t. O/L stable Affirmed. O/L stable Affirmed. Affirmed Affirmed. O/L (-) Mar-08-11 Affirmed. Affirmed Upgrade. O/L (-) Upgrade. O/L (-) Downgrade. O/L stable Affirmed. Review (-) Upgrade. O/L (-) O/L chngd to (+). O/L stable Affirmed. O/L stable O/L chngd to (-). O/L (-) Affirmed. O/L (-) O/L chngd to (-). O/L chngd to (-) Downgrade. O/L chngd to stable Affirmed. O/L stable Sep-21-11 O/L chngd to (-). O/L chngd to (-) Downgrade. O/L stable Affirmed. O/L stable Affirmed. Affirmed Downgrade. O/L stable Affirmed. O/L (-) O/L chngd to stable. O/L stable O/L chngd to (-). O/L (-) Downgrade. O/L stable Affirmed. O/L stable Downgrade. O/L stable Affirmed. O/L stable Affirmed. O/L stable O/L chngd to (+). O/L stable Affirmed. O/L stable Upgrade. O/L stable (+) O/L chngd to stable. O/L chngd to stable (-) Affirmed. O/L stable Affirmed. Affirmed Mar-31-10 O/L chngd to stable. O/L stable Jul-05-11 Affirmed. Morgan Securities LLC Tejal Ray (1-212) 834-8580 tejal. O/L stable O/L chngd to stable. Affirmed Jan-05-10 Affirmed. O/L stable May-27-11 O/L chngd to (+). O/L (-) Upgrade. O/L (-) Downgrade. O/L stable Affirmed. O/L stable Affirmed. O/L stable O/L chngd to (-). O/L stable Affirmed. O/L (-) Recent S&P Action Action Affirmed. Affirmed O/L chngd to stable (-) Upgrade. Affirmed O/L chngd to (-). O/L stable Sep-23-11 O/L chngd to stable. O/L stable Affirmed. O/L stable Affirmed. Affirmed Affirmed. O/L stable Affirmed. O/L stable Apr-11-11 Affirmed. Affirmed Affirmed.P. Affirmed (+) O/L chngd to stable. O/L stable Affirmed. O/L Stable Feb-18-10 O/L chngd to (-). Affirmed Recent S&P Action Action Date Jul-12-11 Jul-20-11 May-31-11 Dec-17-10 Sep-15-11 Aug-24-11 Mar-10-11 Aug-09-11 Jun-03-11 Aug-27-10 Mar-24-11 Sep-09-11 Feb-08-11 Dec-23-10 Nov-19-10 Jul-20-11 Mar-09-11 Jan-18-11 Apr-13-11 Mar-23-10 Nov-02-10 Jul-20-11 Aug-03-11 Sep-26-11 Jun-08-11 Aug-31-11 Jul-16-07 Mar-16-11 Aug-24-11 Dec-22-10 Jan-25-11 Jul-28-11 Sep-20-11 Sep-13-11 Recent Fitch Action Action Date Rating View Rating View Rating View Angola Bahrain Botswana Bulgaria Croatia Czech Republic Egypt Estonia Gabon Ghana Hungary Israel Jordan Kazakhstan Kenya Kuwait Latvia Lebanon Lithuania Morocco* Nigeria Oman Poland Qatar Romania Russia Saudi Arabia Serbia Slovak Republic Slovenia South Africa Tunisia Turkey Ukraine UAE Ba3 Baa1 A2 Baa2 Baa3 A1 Ba3 A1 NR NR Baa3 A1 Ba2 Baa2 NR Aa2 Baa3 B1 Baa1 Ba1 NR A1 A2 Aa2 Baa3 Baa1 Aa3 NR A1 Aa3 A3 Baa3 Ba2 B2 Aa2 BBBBB ABBB BBBAABB AABBB BBBA+ BB BBB B+ AA BB+ B BBB BBBB+ A AAA BB+ BBB AABB A+ AA BBB+ BBBBB B+ NR BBBBB NR BBBBBBA+ BB A+ BBB+ BBBA NR BBBB+ AA BBBB BBB BBBBBNR ANR BBBBBB AABBA+ AA BBB+ BBBBB+ B NR Date EMEA EM (-) (-) (-) Jun-06-11 Upgrade. O/L stable Affirmed. O/L stable (+) (-) (-) (+) (+) (-) (-) (+) Moody’s S&P Fitch Recent Moody’s Action Action Affirmed. O/L chngd to (+) Affirmed. Affirmed Sep-21-11 Affirmed. Affirmed Oct-05-10 Affirmed. O/L chngd to (-) Upgrade. O/L stable Upgrade. O/L (-) (+) O/L chngd to (+). O/L stable Affirmed. Affirmed Sep-23-11 O/L chngd to (-). Affirmed Jun-28-11 Upgrade. O/L (-) Rating View Rating View Rating View Canada Germany France Austria Netherlands Sweden Norway Switzerland Australia United Kingdom United States New Zealand Belgium Spain Japan Italy Ireland Portugal Iceland Greece 24 Aaa Aaa Aaa Aaa Aaa Aaa Aaa Aaa Aaa Aaa Aaa Aaa Aa1 Aa2 Aa3 A2 Ba1 Ba2 Baa3 Ca AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AA+ AA AA+ AA AAA BBB+ BBBBBBCC AAA AAA AAA AAA AAA AAA AAA AAA AA+ AAA AAA AA AA+ AA+ AAAABBB+ BBBBB+ CCC Date Jun-22-11 May-17-11 May-03-11 Aug-18-11 Jul-07-11 Jun-16-11 Jul-04-11 Jul-04-11 Aug-23-11 Jun-20-11 Aug-02-11 Aug-15-11 Apr-20-11 Jul-29-11 Aug-24-11 Oct-4-11 Jul-12-11 Jul-05-11 Apr-06-10 Jul-25-11 Date Apr-23-10 May-18-11 Feb-18-11 Dec-21-10 Mar-28-11 Dec-17-10 Apr-15-11 Feb-25-11 Sep-22-11 Oct-03-11 Aug-05-11 Sep-29-11 Dec-14-10 Feb-01-11 Apr-26-11 Sep-19-11 Apr-01-11 Mar-29-11 May-17-11 Jul-27-11 Date Sep-06-11 Sep-29-11 May-31-11 Jul-25-11 Jul-26-11 Jul-22-11 Jul-22-11 Jul-14-11 Sep-14-11 Mar-14-11 Sep-23-11 Sep-29-11 May-23-11 Mar-04-11 May-27-11 Sep-29-11 Apr-14-11 Apr-01-11 May-16-11 Jul-13-11 Developed Markets (-) (-) (-) (-) (-) (-) (-) (-) (-) (-) (-) (-) (-) (-) (-) (-) (-) (-) (-) (-) (-) (-) . Affirmed Affirmed. O/L (-) Aug-04-11 Upgrade. O/L stable Affirmed. Affirmed Affirmed. O/L stable (+) O/L chngd to stable. O/L stable Dec-12-08 Affirmed. O/L stable Feb-08-11 Affirmed. O/L stable Downgrade. O/L (+) Dec-20-10 Aug-12-11 Jul-25-11 Mar-15-11 Jul-05-11 May-04-11 Feb-01-11 Oct-22-10 Mar-18-11 Jul-04-11 Sep-02-11 Apr-08-11 Sep-22-11 Jun-06-11 Mar-17-11 Jan-17-11 Mar-02-11 Nov-24-10 Sep-02-11 (-) (-) (-) (+) (-) (+) (-) (-) (-) (-) (-) Downgrade. O/L stable Affirmed. O/L stable Affirmed. Affirmed Aug-03-11 Affirmed. O/L stable May-17-11 O/L chngd to (+). O/L stable Downgrade. O/L stable Affirmed. O/L stable Upgrade. O/L stable Affirmed. O/L (-) Recent Fitch Action Action Affirmed. O/L stable Upgrade. O/L negative Downgrade. O/L stable Downgrade. O/L (+) Affirmed. O/L stable Upgrade. Affirmed Downgrade. O/L stable Jul-24-07 Affirmed. Affirmed Affirmed. O/L stable Affirmed. O/L stable Oct-06-06 Affirmed. O/L (-) Apr-17-08 Upgrade. O/L stable Feb-15-10 Upgrade. O/L chngd to stable Dec-06-10 Affirmed.J. O/L (-) Downgrade. Affirmed Upgrade. O/L (-) Mar-31-10 Upgrade. O/L stable Affirmed. O/L stable Affirmed. O/L stable Aug-30-11 Affirmed. Affirmed Sep-14-11 Affirmed. Affirmed Sep-14-11 O/L chngd to (-). Affirmed Jun-18-03 Upgrade. O/L stable Affirmed. O/L (-) O/L chngd to stable. 2011 EMEA EM and Developed Markets Credit Ratings Moody’s S&P Fitch Recent Moody’s Action Action Upgrade. O/L negative (-) Affirmed. O/L stable Affirmed. O/L (+) Oct-11-10 Affirmed. Affirmed (+) Affirmed. O/L stable Downgrade. O/L stable Mar-31-10 O/L chngd to (+). O/L stable O/L chngd to stable. O/L stable Jul-09-07 Upgrade. Affirmed O/L chngd to (-). O/L stable Affirmed. Affirmed (+) O/L chngd to stable. Affirmed Downgrade. O/L stable Affirmed. O/L chngd to (-) Affirmed. Affirmed Jun-06-11 Affirmed. Affirmed Upgrade. O/L chngd to (-) Jan-11-11 Upgrade. O/L stable Affirmed. O/L stable O/L chngd to (-). O/L stable Affirmed. O/L stable Jul-22-11 O/L chngd to (+). Affirmed Apr-13-10 O/L chngd to stable. O/L stable Affirmed.com Emerging Markets Research Emerging Markets Outlook and Strategy October 4.ray@jpmorgan. O/L stable Affirmed. O/L (-) May-24-11 Affirmed. O/L (-) Downgrade. O/L stable Upgrade. O/L stable Affirmed. Affirmed Jul-16-09 O/L chngd to stable. O/L stable Affirmed. O/L stable Affirmed. O/L stable Downgrade. O/L stable Aug-05-10 Upgrade. O/L Stable Affirmed. O/L stable Affirmed. O/L stable Affirmed. O/L stable May-24-11 O/L chngd to stable. O/L stable Affirmed. O/L chngd to (+) Jul-25-11 O/L chngd to (-).
O/L stable Downgrade. 2011 Local Currency Ratings (GBI-EM Broad Countries) Moody’s Rating View Brazil Chile China Colombia Czech Republic Hungary India Indonesia Malaysia Mexico Peru Poland Russia Slovakia South Africa Thailand Turkey Baa2 Aa3 Aa3 Baa3 A1 Baa3 Ba1 Ba1 A3 Baa1 Baa3 A2 Baa1 A1 A3 Baa1 Ba2 (+) (+) (-) (+) (+) (+) S&P Rating View BBB+ AA A+ BBB+ AA BBBBBBBB+ A ABBB+ A BBB+ A+ A ABB+ (+) (+) (-) (+) (+) Fitch Rating View BBBAAAABBB AABBB BBBBB+ A BBB+ BBB A BBB A+ A ABB+ (-) (+) (+) (-) (+) Recent Moody’s Action Action O/L chngd to (+). Affirmed Upgrade. Affirmed Dec-09-10 Upgrade. O/L stable Downgrade. O/L stable Affirmed. Affirmed Mar-27-09 Downgrade.t. O/L (+) Downgrade. O/L stable Nov-11-10 May-31-11 Aug-04-11 Downgrade. O/L chngd to stable Jun-16-10 Upgrade. O/L stable O/L chngd to (+). Affirmed Dec-12-08 O/L chngd to stable.com Emerging Markets Research Emerging Markets Outlook and Strategy October 4. An outlook suggests that a review/watch or a long/intermediate-term movement is likely. O/L stable Affirmed. Affirmed Oct-05-10 O/L chngd to stable. O/L stable O/L chngd to (+). O/L chngd to (-) Dec-06-10 Upgrade. O/L (+) Affirmed. O/L stable O/L chngd to (+). O/L chngd to (+) Affirmed. Affirmed Affirmed. O/L stable Upgrade. O/L stable Affirmed.J. O/L stable Affirmed. O/L stable Affirmed. O/L stable Affirmed.P. O/L (+) Affirmed. O/L chngd to (+) Affirmed. O/L (-) Date Jun-20-11 Date Dec-14-10 Dec-16-10 Jan-12-10 Mar-16-11 Aug-24-11 Mar-24-11 Apr-06-11 Apr-08-11 Jul-27-11 Jul-28-11 Aug-30-11 Aug-03-11 Aug-31-11 Dec-16-09 Jan-25-11 Date Jun-28-10 Feb-01-11 Aug-18-11 Jun-22-11 Jun-04-10 Jun-06-11 Jun-14-10 Jan-25-10 Aug-11-11 Jan-12-11 Jul-27-11 Mar-18-11 Sep-02-11 May-18-10 Jul-27-09 Upgrade. O/L stable Affirmed. Affirmed O/L chngd to stable. Morgan Securities LLC Tejal Ray (1-212) 834-8580 tejal. O/L Stable Affirmed. O/L stable Affirmed. Affirmed Affirmed. (+) positive outlook (-) negative outlook WR Rating Withdrawn + positive review/watch .negative review/watch Default 25 . Affirmed Nov-24-10 RATING SCALE MOODY’s Upper Investment Grade Aaa Aa1 Aa2 Aa3 A1 A2 A3 Baa1 Baa2 Baa3 Ba1 Ba2 Ba3 B1 B2 B3 Caa1 Caa2 Caa3 Ca C S&P AAA AA+ AA AAA+ A ABBB+ BBB BBBBB+ BB BBB+ B BCCC+ CCC CCCCC C SD D Fitch AAA AA+ AA AAA+ A ABBB+ BBB BBBBB+ BB BBB+ B BCCC+ CCC CCCCC C RD D Not currently subject to change STANDARD TERMINOLOGY AND PROCEDURES MOODY’s S&P STABLE STABLE Fitch STABLE Possible long-term change Likely to be put on review OUTLOOK (+or-) OUTLOOK (+or-) OUTLOOK (+or-) Lower Investment Grade Likely change in short term REVIEW (+or-) CREDITWATCH (+or-) RATING WATCH (+or-) Non-Investment Grade Lower Non-Investment Grade UPGRADE / DOWNGRADE AFFIRMED / STABLE UPGRADE / DOWNGRADE AFFIRMED / STABLE UPGRADE / DOWNGRADE AFFIRMED / STABLE Moody’s ratings are qualified by outlooks and reviews while S&P and Fitch ratings are qualified by outlooks and watches. O/L stable Recent Fitch Action Action O/L chngd to (+). O/L stable Jul-26-10 Feb-10-11 Feb-26-09 Aug-18-11 Mar-21-11 Jan-05-10 (+) O/L chngd to stable. O/L stable Affirmed. O/L (+) O/L chngd to stable. O/L stable Affirmed. O/L (-) Upgrade. Affirmed May-12-11 Sep-20-11 O/L stable chngd to (+). O/L (-) Affirmed. A review/watch is indicative of a likely short-term movement. O/L stable Affirmed. Affirmed Recent S&P Action Action Affirmed. O/L stable Affirmed.ray@jpmorgan. Affirmed Oct-28-10 (+) O/L stable chngd to (+). O/L stable Affirmed. Affirmed O/L chngd to stable. O/L stable Affirmed. Affirmed Upgrade. O/L stable Jul-16-09 O/L chngd to stable. O/L stable Affirmed.
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Morgan Credit Research Analysts in the subject company over the past 12 months (or.375% ’13 Lukoil . or benchmark). Morgan Securities Ltd. and (2) no part of any of the research analyst’s compensation was. the recommended risk position is expected to outperform the relevant index.optionsclearing.. Morgan Recommendation History Date Jun-24-11 Rating Overweight Instrument 5. We also analyze the company’s ability to generate cash flow by reviewing standard operational measures for comparable companies in the sector. Morgan is the global brand name for J.P. Bank of Kazakhstan.. Dev. opinions and recommendations of J.P. Morgan’s Emerging Market research uses a rating of Marketweight. and Underweight (over the next three months. Morgan acted as lead or co-manager in a public offering of equity and/or debt securities for Country Garden Holdings. is. Morgan credit research analysts and research strategists. sector.. In addition. Bank of Kazakhstan. As a general matter. 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BBVA. Morgan trading desks which may conflict with your interests. Morgan uses the following sector/issuer portfolio weightings: Overweight (over the next three months. sector. J.J. Beijing Enterprises Holdings Limited. Dev. 2011 Overweight Neutral Underweight EMEA Credit Research Universe 28% 50% 22% IB clients* 58% 64% 49% Represents Ratings on the most liquid bond or 5-year CDS for all companies under coverage. VEB. J. sector. Dubai World.P. J. including the quality and accuracy of research. Cemex. Morgan Recommendation History Date Nov-30-10 Rating Overweight Instrument 8.P. • Lead or Co-manager: J. such information is available only to persons who have received the proper option risk disclosure documents. 27 . competitive factors and overall firm revenues.P. Morgan owns a position of 1 million USD or more in the debt securities of Vimpelcom Ltd. We assess this by analyzing. Hutchison Whampoa. VEB. Morgan Equities Limited. Morgan Recommendation History Date Jun-24-11 Rating Neutral Instrument 6.P. Road King Infrastructure Ltd.P. Lukoil. Digicel Group Limited.356% ’17 Dev. on the quality and accuracy of their analysis. Dubai World. Bank of Kazakhstan . Votorantim.J. Banco de Credito del Peru.P.P. Neutral (over the next three months. Dev.P. NII Holdings.J. Morgan trading desk personnel in formulating views.P.P.com/publications/risks/riskstoc. client feedback. among other things. Morgan Recommendation History Date May-27-11 Rating Underweight Instrument 6.P. The firm’s overall revenues include revenues from its investment banking and fixed income business units. Morgan Securities LLC (JPMS) and its non-US affiliates worldwide. as principal on the basis of the research analyst(s) and strategist(s) views and report(s). Dubai World.P. Morgan Securities Ltd. or benchmark). which is equivalent to a Neutral rating. J. . • Other Significant Financial Interests: J. Hypermarcas.J.P.J. and/or J. Cemex. 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