1、Disclosures&Disclaimer This report must be read with the disclosures and the analyst certifications in the Disclosure appendix,and with the Disclaimer,which forms part of it.Issuer of report:The Hongkong and Shanghai Banking Corporation Limited View HSBC Global Research at:https:/ THIS CONTENT MAY N
2、OT BE DISTRIBUTED TO THE PEOPLES REPUBLIC OF CHINA(THE PRC)(EXCLUDING SPECIAL ADMINISTRATIVE REGIONS OF HONG KONG AND MACAO)Capture the carry at the front-end of the curveIn EM high yielders,we favour local bonds in Russia,Mexicoand IndonesiaOur conviction call in duration exposure lies in ChinaEasi
3、ng gains traction EM policy easing is gaining traction.And in the US,not only is the Fed set to keep rates on hold this year but also its balance sheet reduction programme will come to an end in September.This means the carry characteristics of EM local government bonds are becoming more appealing.T
4、he catalyst for all this though is a global economic slowdown with the latest inversion of US Treasury curve suggesting risks of an eventual US recession.This encourages us to avoid too much duration and we see better value at the front-end of the local rates curve in most EMs.The credit risk premiu
5、m in local bond yields may also begin to move higher with a crowded event calendar starting in April,which again argues against taking duration exposure in high-yielding markets.Foreign flows the tide has cautiously turned The tide of foreign flows into EM bonds has turned at the start of 2019.This
6、appears to have been driven by expectations of fixed income gains but a lack of appetite for currency risks.There have been inflows of USD16.3bn into EM hard currency bonds since the beginning of this year vs only USD1.7bn into local debt.Furthermore,there is already crowded positioning at the long-
7、end of most EM local bond curves and increasing prospects of a steeper local yield curve.An increase in allocation to short duration bonds within EM is therefore likely,in our view.What we like Among the high yielders,we favour Russia(Long 5yr OFZs),Mexico(Long 3yr MBonos)and Indonesia(Long 10yr Ind
8、oGBs).Volatility-adjusted carry is still quite sizeable in these markets and respective monetary policies are still restrictive given a benign inflation outlook.Local bond yields are therefore likely to continue to edge lower due to the prospects of a deeper policy easing cycle.We also recommend add
9、ing a long 4yr India Gsec position and long 2yr Philippines government bonds.The Reserve Bank of India is set to embark on another policy rate cut in April,while the prospects of policy rate cuts are increasing in the Philippines under the new central bank Governor Benjamin Diokno.Our conviction cal
10、l in duration exposure lies in China(long 10yr CGBs)where economic growth is slowing and government bonds are set to benefit from an impending index inclusion.Andre de Silva,CFA Head of Global EM Rates Research The Hongkong and Shanghai Banking Corporation Limited .hk+852 2822 2217Pin Ru Tan Asia-Pa
11、cific Rates Strategist The Hongkong and Shanghai Banking Corporation Limited,Singapore Branch .sg+65 6658 8782Radoslaw Bodys Head of CEEMEA Rates Strategy HSBC Bank plc +44 20 7991 5882Dayeon Hong Asia Pacific Rates Strategist The Hongkong and Shanghai Banking Corporation Limited .hk+852 2996 6569Hi
12、manshu Malik,CFA Asia-Pacific Rates Strategist The Hongkong and Shanghai Banking Corporation Limited .hk+852 3941 7006Monty Gandhi LatAm Fixed Income Strategist HSBC Securities(USA)I+1 212 525 6483Tom Nash,CFA Strategist HSBC Bank Australia Limited .au+61 2 9084 2433Piran Phippen CEEMEA Rates Strate
13、gist HSBC Bank plc +44 20 7991 5693Zoe Fang Associate,Asia-Pacific Rates Strategy The Hongkong and Shanghai Banking Corporation Limited .hk+852 2822 466528 March 2019 EM Rates:Carry the day Fixed Income Rates Global Emerging Markets Seeking shelter in front-end Fixed Income Rates 28 March 2019 2 Loc
14、al bonds barometer 3 Top Trades 4 Clients questions on EM 5 EM Rates 6 Capture the carry at the front-end of the curve 6 Watch out for packed political/event time calendar 7 Turning tide of foreign flows 9 EM hard debt 10 Fund flows still favouring external debt 10 although signs are that investors
15、are becoming more discerning 10 SOE sovereign spill-overs:Eskom vs Pemex 11 China bond index inclusion 12 EM FX:Its still quality over quantity 14 EM Economics 15 Goldilocks or not?15 EM high yielders 16 Mexico 16 Russia 17 Indonesia 18 Malaysia 19 Philippines 20 Brazil 21 India 22 South Africa 23 E
16、M low yielders 24 Onshore China 24 Czech Republic 25 Hungary 26 Israel 27 Poland 28 Romania 29 Korea 30 Andean markets 31 Colombia 31 Chile 32 Frontier markets 33 Argentina 33 Sri Lanka 34 Recent EM publications 35 Disclosure appendix 42 Disclaimer 46 Contents 3 Fixed Income Rates 28 March 2019 Tabl
17、e 2.Emerging Markets Local Bonds Value Matrix Brazil Mexico Indonesia India*China Malaysia South Africa*Russia External factors FX adequacy ratio*1.6 1.2 1.1 1.3 0.8 1.2 0.6 3.3 FX reserves(USDbn)368.9 169.4 109.4 377.8 3,090.2 98.8 42.6 376.6 Short-term external debt(%of reserves)7.2 3.0 51.8 27.2
18、42.1 93.4 65.7 16.5 Import coverage ratio(months)28.1 4.4 6.8 7.7 15.4 7.4 7.4 20.1 Macro variables Current account balance(FY19e,%of GDP,HSBC forecasts)-1.1-1.7-2.6-2.2 0.3 2.2-2.9 4.9 Fiscal balance(FY19e,%of GDP,HSBC forecasts)-4.0-2.9-1.7-3.4-2.8-3.4-5.1 2.3 Household debt(%of GDP)27.1 16.1 17.0
19、 11.3 51.5 67.0 33.0 16.9 Headline CPI(last,%y-o-y)3.9 3.9 2.6 2.6 1.5-0.4 4.1 5.2 HSBC CPI forecasts(end-2019e,%y-o-y)4.5 4.1 4.4 4.6 2.2 3.0 5.8 4.5 Positioning&sensitivity Sensitivity-0.17 0.14-0.22 0.15 0.03 0.01 0.46-0.25 Latest foreign ownership of local government debt 11.8%32.2%38.6%3.6%7.9%
20、24.2%38.4%25.0%Foreign ownership(a year ago)12.4%31.8%39.3%4.4%5.7%29.2%41.1%33.9%*FX adequacy ratio-IMF Ratio of reserve/ARA metric(November 2018).*FY19 refers to 1 April 2019-31 March 2020 for India and South Africa.Beta computed using a regression between the yields of 10-year government bonds an
21、d US Treasuries over the past three months.Source:HSBC forecasts Local bonds barometer Table 1.Emerging Markets Local Currency Bonds Outlook Brazil Mexico Indonesia India China*Malaysia Russia South Africa View on local bonds Neutral Mildly Bullish Mildly Bullish Neutral Bullish Mildly Bullish Mildl
22、y Bullish Mildly Bearish 10-year nominal yield(%)9.13 7.91 7.64 7.30 3.08 3.79 8.29 9.29 Correlation to UST*-0.07 0.10-0.16 0.12 0.07 0.04-0.18 0.31 Trend in foreign flows Monetary policy bias FX outlook*Correlation computed using daily yield data over the past three months.Trend in foreign flows is
23、 based on the latest monthly flows for the country.Based on HSBC FX Research(Currency Outlook)and HSBC Economics forecasts for end-2019.Data include government+corporate flows.Source:HSBC.*Monetary policy outlook in China based on the Reserve Requirement Ratio.Fixed Income Rates 28 March 2019 4 Top
24、Trades 1.Long Russia OFZ6.5 Feb24Entry:8.18%Target:7.25%Stop:8.67%Entry date:28-Feb-18 Current:7.98%Strong fundamentals and a begin inflation outlook Risks:A sudden change in inflation trajectory or sanctions-related newsflow 2.Long Mexico Mbono7.25 Dec21Entry:8.87%Target:7.65%Stop:8.00%Entry date:2
25、9-Nov18 Current:7.69%Front-end is likely to be driven by Banxico actions rather than fiscal worries Foreigners likely to position at the front-end of the curve on the back of attractive carry Risks:Excessive pricing of rate hikes in the curve 3.Long China10yr CGBEntry:3.86%Target:2.70%Stop:3.40%Entr
26、y date:14-Mar-18 Current:3.09%Slower economic growth and a slower pace of financial deleveraging Risks:Currency depreciation or higher USD rates 4.Long India Gsec7.37 Apr235.Long Philippines RPGB4.875 Jun21Entry:6.85%Target:6.30%Stop:7.00%Entry:5.92%Target:5.40%Stop:6.20%Entry date:27-Mar-19 Current
27、:6.85%Entry date:13-Mar-19 Current:5.88%6.Long Indonesia IndoGB8.25 May297.Pay ZAR10Y USD vs Rec USD10Y IRSEntry:7.60%Target:7.00%Stop:8.00%Entry:550bp Target:610bp Stop:515bp Entry date:27-Mar-19 Current:7.60%Entry date:13-Dec-18 Current:570bp Source:Bloomberg,HSBC.*For full details of open trades
28、including risks and rationale,please refer to Table 4 on page 36.Revised stop 7.07.58.08.59.0Jan-19Mar-19Mar-19Apr-19%Russia OFZ 6.5 02/24EntryTarget7.58.08.59.0Nov-18Dec-18Jan-19Feb-19Mar-19Apr-19%Mexico Mbono7.25 Dec21EntryTarget2.42.83.23.64.0Mar-18Jun-18Sep-18Dec-18Mar-19%China 10yr CGBEntryTarg
29、et5 Fixed Income Rates 28 March 2019 1.In Brazil,what are the expected paths of the social security reform in coming months?The social security reform is delayed compared with the initially expected timeline.Previously,the reform was expected to pass the Constitution and Justice Committee(CCJ)by the
30、 end of March or at least by early April;however,with no rapporteur announced yet for the CCJ post the recent disagreements between the government and congress,it may be delayed further by a week or two.After that,it needs to go through the special committee,where the negotiations on the content wil
31、l take place.After that,it goes to the floor of the lower house for two votes,followed by the Senate votes.The speed at which it will pass the Special committee and the first vote in the lower house may depend on the negotiations,but market participants are likely to perceive it positive if the voti
32、ng in the lower house is done before the July recess.The concern is that if it is delayed and the approval ratings of the Presidents drop as time passes,there is likely to be more dilution.Finance Minister Paulo Guedes said that he expects the pension reform to be resolved in 3-4 months(source:Bloom
33、berg,25,March 2019).HSBCs base case remains that the reform is likely to pass but the question on dilution remains open.We were stopped out of our previous trade recommendation to long DI 21-22 FRAs with the volatility seen recently and we prefer to maintain a neutral stance as more risk premium cou
34、ld be priced in in the near term.However,in the medium term,considering eventual social security reform and privatizations,we believe real rates in Brazil should be lower.2.What are the latest opinion polls indicating for Indonesia and India elections?Indonesias parliament and presidential election
35、is due on 17 April 2019,while Indias general election will take place in seven phases across the nation,from 11 April to 19 May 2019.In Indonesia,most polling agencies show a clear lead for President Joko Widodo over his challenger Prabowo Subianto.Australian pollster Roy Morgan has released results
36、 of a poll done in January 2019.It surveyed 1,039 Indonesians,of which 58%of respondents support President Joko Widodos relection bid while 42%support Prabowo Subianto.Meanwhile,local pollster Saiful Mujani Research and Consulting interviewed 2,820 respondents from 24 February to 5 March,of which 57
37、.6%of respondents support Jokowi,up from 54.9%in a January survey.31.8%of those polled support Prabowo,down from 32.1%.Generally,available polls suggest that President Joko Widodo stands a good chance of being re-elected on 17 April.If President Joko Widodo gets re-elected with such wide margins,his
38、 performance will be seen as stronger than in the 2014 Presidential elections where he won 53.15%of the total vote while Prabowo Subianto scored 46.85%.For India,opinion polls swung slightly in favour of Prime Minister Narendra Modis camp following the border skirmish with Pakistan.In January 2019,A
39、BP News-C Voter poll had put the Prime Ministers National Democratic Alliance(NDA)at 233 seats out of 543 available Lok Sabha seats.In early March 2019 after the border conflict,the same pollster put the coalitions seats at 264 seats,while a separate poll by Times Now-VMR poll released in mid-March
40、predicts that Prime Minister Narendra Modis NDA is expected to return to power with 283 seats.Overall,it appears that the Prime Ministers re-election bid has strengthened over the past month but note that the opinion poll numbers still pale in comparison with the 2014 election result where the NDA t
41、ook 336 Lok Sabha seats.3.What could be the potential flows impact of China inclusion in MSCI Emerging Market Index and Bloomberg BarclaysGlobal Aggregate Index?For equities,MSCI will quadruple the weight of China A-shares in its Emerging Market Index(EMI)this year.This involves lifting the inclusio
42、n factor of over 250 large-cap names from 5%to 20%in three tranches in May,August and November,as well as adding 27 ChiNext large-cap shares with a 10%inclusion factor from May.In addition,141 MSCI China A Mid Cap Index constituents(20%IF)will be added with a 20%inclusion factor in November.Based on
43、 these adjustments,the pro forma weight of China A-shares in the MSCI EMI will be 3.3%in November 2019 from 0.7%as of now.As the MSCI EMI is being tracked by USD1.84trn of global assets,of which 22%are passive funds,we estimate that these weight increases will lead to inflows of over USD10bn in 2019
44、 from passive funds.If we include all funds benchmarked to MSCI EMI,MSCI Asia ex Japan Index and MSCI All Country World Index(ACWI),the fund inflows could total cUSD73bn.Separately,the China government and policy bank bonds will be included on 1 April 2019 into three of Bloombergs bond indices,of wh
45、ich the most widely tracked is the Bloomberg Barclays Global Aggregate Index(BBGA).This will be an equal-weighted phase in process that will take 20 months,from April 2019 to November 2020.We estimate this inclusion is likely to lead to foreign inflows of cUSD150bn over the period(Please refer to Pa
46、ge 12 for more details).Clients questions on EM Fixed Income Rates 28 March 2019 6 Capture the carry at the front-end of the curve The carry characteristics of EM local government bonds are becoming more appealing.EM policy easing is gaining traction(EM Rates:Race for rate cuts(v.2.0),28 February 20
47、19),and not only is the Fed set to keep rates on hold this year but its balance sheet reduction will come to an end in September.The catalyst for all these though is a global economic slowdown with the latest inversion of US Treasury curve suggesting risks of an eventual US recession.We therefore se
48、e better value at the front-end of the local rates curve in most EMs and stay away from duration.Positioning is also crowded and there is a heavy political/event calendar in the coming months(see pages 7-9).We also note that EM local government bonds have delivered total period returns of 8.6%over t
49、he past six months.This has been mostly led by fixed income gains(6.1%)as the majority of the local bond curves flattened out with falling US rates.That said,it now looks more appropriate to position at the front-end of the curve,which still offers attractive carry over US rates on a risk-adjusted b
50、asis(Figure 1).Among EM high yielders,our most favoured markets are Russia(Long 5yr OFZs),Mexico(Long 3yr MBonos)and Indonesia(Long 10yr IndoGBs).Volatility-adjusted carry is still quite sizeable in these markets and respective monetary policies are still restrictive given a benign inflation outlook
