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:/ Click here to wat
2、ch the videoTHIS CONTENT MAY NOT BE DISTRIBUTED TO THE PEOPLES REPUBLIC OF CHINA(THE PRC)(EXCLUDING SPECIAL ADMINISTRATIVE REGIONS OF HONG KONG AND MACAO)Oil price at current levels have begun to bite in certain EMs Event risks in a few EM high-yielders also point towards a potential pick-up in vola
3、tility in the summer months Russia local government bonds are our top pick within EM Oil beginning to bubble The potion of higher oil prices and fiscal strains is beginning to brew potential problems for certain EMs.This is less about reigniting inflation given the benign backdrop of consumer prices
4、 and more about the fiscal burden and widening current account deficits.US sanctions,including the end of waivers for Iranian crude imports,as well as the ongoing commitment to production cuts by OPEC+,are driving a spike in oil prices.Many large EM oil importers oil price budget assumptions for thi
5、s year are well below the prevailing level,such as Indias,suggesting increased fiscal constraints.In contrast,a few EM exporters have quite conservative oil price assumptions.Russia,in particular,stands to benefit from higher oil prices.EM sensitivities to oil prices The sensitivity of EM bonds to o
6、il prices has dropped recently,but still indicates that a key threshold is USD70 per barrel or above for Brent crude.Among the oil importers,India continues to show the greatest beta sensitivity,with large jumps in yield reflecting higher oil prices.In contrast,for net oil exporters,Russia represent
7、s the largest drop in local government bond yields related to higher crude oil prices.Favour local bonds in Russia over India,Turkey,and South Africa There are other factors to consider,but our portfolio stance is skewed to factor in the oil price risks,i.e.we are bullish on Russia but bearish on In
8、dia,Turkey and South Africa local government bonds.Event risks surrounding ongoing(India)or upcoming(South Africa,Argentina)elections and the passage of social security reforms in Brazil underline our cautious view on duration in EM high-yielders.The recent sharp spike in Argentina CDS spreads,doubl
9、ing of bond yields and inverted yield curve are a timely reminder to be wary of EM contagion risks reminiscent of last years.We prefer low-beta markets,i.e.Israel,Hungary,the Czech Republic,and Thailand,but turn tactically neutral on China local rates on the back of the recent pick-up in growth.Pref
10、er external debt to local currency debt Investors preference for EM external debt over EM local debt is likely to continue and is in line with our stance.Low US rates,a resilient USD and a higher skew of oil exporters in outstanding external debt should be supportive for external debt while many loc
11、al debt markets are expected to price in a higher risk premium for rising oil prices and FX risks.Andr de Silva,CFA Head of Global EM Rates Research The Hongkong and Shanghai Banking Corporation Limited .hk+852 2822 2217 Pin Ru Tan Asia-Pacific Rates Strategist The Hongkong and Shanghai Banking Corp
12、oration Limited,Singapore Branch .sg+65 6658 8782 Radoslaw Bodys Head of CEEMEA Rates Strategy HSBC Bank plc +44 20 7991 5882 Dayeon Hong Asia Pacific Rates Strategist The Hongkong and Shanghai Banking Corporation Limited .hk+852 2996 6569 Himanshu Malik,CFA Asia-Pacific Rates Strategist The Hongkon
13、g and Shanghai Banking Corporation Limited .hk+852 3941 7006 Monty Gandhi LatAm Fixed Income Strategist HSBC Securities(USA)I+1 212 525 6483 Tom Nash,CFA Strategist HSBC Bank Australia Limited .au+61 2 9084 2433 Piran Phippen CEEMEA Rates Strategist HSBC Bank plc +44 20 7991 5693 Zoe Fang Associate,
14、Asia-Pacific Rates Strategy The Hongkong and Shanghai Banking Corporation Limited .hk+852 2822 4665 Dr Murat Ulgen Global Head of Emerging Markets Research HSBC Bank plc +44 20 7991 6782 Nicholas Smithie Senior GEMs Multi-Asset Strategist HSBC Securities(USA)I+1 212 525 5350 2 May 2019 EM Rates Fixe
15、d Income Rates Global Emerging Markets Oil spoils&fiscal toils Fixed Income Rates 2 May 2019 2 Local bonds barometer 3 Top Trades 4 Clients questions on EM 5 EM Rates 6 Sell in May and Go away?6 Oil foils the broad EM rally 8 Monetary policy backdrop is still benign 8 Shifts and rifts with indexatio
16、n related changes 9 EM hard debt 11 Breaking down hard debt 11 Spreads have tightened,emphasis now on US yields 11 EM FX:Quality over quantity 13 EM Economics 14 The EM tug-of-war 14 EM high-yielders 15 Brazil 15 Indonesia 16 Russia 17 Malaysia 18 Mexico 19 The Philippines 20 India 21 South Africa 2
17、2 Turkey 23 EM low-yielders 24 Onshore China 24 Poland 25 Czech Republic 26 Hungary 27 Israel 28 Korea 29 Andean markets 30 Colombia 30 Chile 31 Frontier markets 32 Argentina 32 Sri Lanka 33 Recent EM publications 34 Disclosure appendix 41 Disclaimer 44 Contents 3 Fixed Income Rates 2 May 2019 Table
18、 2.Emerging Markets Local Bonds Value Matrix Brazil Mexico Indonesia India*China Malaysia South Africa*Turkey Russia External factors FX adequacy ratio*1.6 1.2 1.1 1.3 0.8 1.2 0.6 0.7 3.3 FX reserves(USDbn)374.5 170.8 117.2 386.0 3,098.8 99.4 42.6 73.9 376.6 Short-term external debt(%of reserves)8.6
19、 3.0 50.3 23.3 42.5 90.2 64.6 183.0 15.5 Import coverage ratio(months)24.4 4.3 8.1 9.3 15.7 6.9 6.2 3.8 20.4 Macro variables Current account balance(FY19e,%of GDP,HSBC forecasts)-1.3-1.7-2.6-2.2 0.3 2.2-2.9-2.1 4.9 Fiscal balance(FY19e,%of GDP,HSBC forecasts)-4.6-2.9-1.7-3.4-2.8-3.4-5.1-3.9 2.3 Hous
20、ehold debt(%of GDP)27.1 16.1 17.0 11.3 51.5 67.0 33.0 15.6 16.9 Headline CPI(last,%y-o-y)4.6 4.0 2.5 2.9 2.3 0.2 4.5 19.7 5.3 HSBC CPI forecasts(end-2019e,%y-o-y)4.2 3.9 3.9 4.0 2.2 2.2 5.3 18.3 4.5 Positioning&sensitivity Sensitivity-0.45 0.25-0.15 0.28 0.26 0.04 0.32-1.13-0.09 Latest foreign owner
21、ship of local government debt 12.2%31.5%38.5%3.4%8.0%24.3%38.9%14.8%26.7%Foreign ownership(a year ago)12.4%31.9%38.4%4.4%5.9%29.4%42.8%22.1%34.5%*FX adequacy ratio-IMF Ratio of reserve/ARA metric(November 2018).*FY19/20 refers to 1 April 2019-31 March 2020 for India and South Africa.Beta computed us
22、ing a regression between the yields of 10-year government bonds and 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 Turkey View on local bonds B
23、ullish Mildly Bullish Bullish Bearish Neutral Mildly Bullish Mildly Bullish Mildly Bearish Bearish 10-year nominal yield(%)8.97 8.06 7.74 7.41 3.42 3.79 8.25 9.12 18.02 Correlation to UST*-0.15 0.20-0.11 0.29 0.41 0.08-0.07 0.21-0.14 Trend in foreign flows Monetary policy bias FX outlook *Correlatio
24、n computed using daily yield data over the past three months.Trend in foreign flows is based on the latest monthly flows for the country.Based on HSBC FX Research(Emerging Markets FX Roadmap)and HSBC Economics forecasts for end-2019.Data include government+corporate flows.Source:HSBC.*Monetary polic
25、y outlook in China based on the Reserve Requirement Ratio.Fixed Income Rates 2 May 2019 4 Top Trades 1.Long Russia OFZ6.5 Feb24 Entry:8.18%Target:7.25%Stop:8.67%Entry date:28-Feb-19 Current:7.88%Strong fundamentals and a begin inflation outlook Risks:Increase in geopolitical tensions 2.Long Mexico M
26、bono7.25 Dec21 Entry:8.87%Target:7.65%Stop:8.10%Entry date:29-Nov18 Current:7.96%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 cur
27、ve 3.Long Malaysia MGS3.733 Jun28 Entry:3.86%Target:3.60%Stop:4.05%Entry date:27-Mar-19 Current:3.88%Rebound in oil prices Attractive valuations versus the rest of the maturity segment Risks:Any slippage to fiscal consolidation plan 4.Long Indonesia IndoGB8.25 May29 5.Long Brazil NTN-F 2027s Entry:7
28、.60%Target:7.00%Stop:8.00%Entry:8.83%Target:8.10%Stop:9.35%Entry date:27-Mar-19 Current:7.80%Entry date:28-Mar-19 Current:8.88%6.Long Philippines RPGB4.875 Jun21 7.Rec Israel 3Y IRS Entry:5.92%Target:5.40%Stop:6.20%Entry:78bp Target:40bp Stop:78bp Entry date:13-Mar-19 Current:5.86%Entry date:29-Jan-
29、19 Current:72bp Source:Bloomberg,HSBC.*For full details of open trades including risks and rationale,please refer to Table 5 on page 35.Revised stop 7.07.58.08.5Jan-19Feb-19Mar-19Apr-19May-19%Russia OFZ 6.5 Feb24EntryTarget7.58.08.59.0Nov-18Jan-19Mar-19May-19%Mexico Mbono7.25 Dec21EntryTarget3.43.63
30、.84.04.2Feb-19Mar-19Apr-19May-19%Malaysia MGS3.733 Jun28EntryTarget 5 Fixed Income Rates 2 May 2019 1.Chinas government bond yields spiked in April.Is this the start of a broader sell-off?China government bonds sold off in April,largely due to better-than-expected economic data and the increased mon
31、ey market volatility triggered by the central banks slight change of stance in the money market.Economic data for March,from the survey-based PMI to activity data like industrial production and retail sales,showed signs of an economic rebound.This kick-started the bearish sentiment in the bond marke
32、t.We would however,caution that seasonality was at play.Given that the Lunar New Year was in early February this year,there are more working days for companies and factories in March this year,compared to March 2018.It is also worth noting that the government does not appear fully confident of a gro
33、wth rebound as the Politburo stated on 19 April after the Q1 GDP beat,that there is still downside pressure on economic growth.It is true though that the central banks liquidity stance has become less predictable.This is to target the increase in leverage in the equity and bond markets as well as to
34、 control the exuberant total social financing growth seen in Q1.This approach to introduce more money market volatility is likely to be visible through Q2 as leverage concerns return to the fore.However,given the global growth uncertainties,we do not expect this approach to last beyond the next few
35、months.As such,we expect a downward retracement in yields from late Q2 onwards.2.Should we be concerned about EM inflation arising from higher oil prices,pork prices and El Nino?We are not concerned about the inflation impact from higher oil prices.While the recent rise has been sharp,the percentage
36、 increase on a year-on-year basis remains low.The inflation impact from higher pork prices and El Nino,though,is worth watching.The African swine fever has hit part of China and live pig stocks have fallen by 19%y-o-y while productive sow herd have fallen by 21%y-o-y.Given this development,the Agric
37、ulture Ministry estimates that pork prices in China will rise by as much as 70%in the second half of 2019.The countrys pork imports will continue to increase,potentially keeping meat prices high globally.Separately,the El Nino weather phenomenon,which causes rainfall deficit,could also place upward
38、pressure on crop prices.For example,there has been a drought in Northeast Thailand,while rainfall deficits are expected over Central America over the next three months.All else equal,the combined impact of higher pork prices and El Nino would have bigger implications for countries with larger food w
39、eight in their CPI basket such as India(46%),Philippines(38%),Thailand(36%),Russia(31%)and Malaysia(24%).Given that this is supply-side inflation,we see no reason for rate hikes particularly when global growth momentum is weak,though the available scope for monetary easing could be limited.3.What ar
40、e the signposts to look out for in Brazils social security reform?On 24 April,the Constitution and Justice Committee(CCJ)approved the social security proposal by a vote of 48-18.Now,the proposal proceeds to the Lower Houses Special committee.It would need to come out of the special committee by mid-
41、June to get voted in the lower house before the July recess.Therefore,the proposal would be passed for a vote in the upper house by September.There are several risks to these timings.First,the special committee could take a while to revise the proposal.It took 96 days with former President Michel Te
42、rmers constitutional amendment.If so,the lower house vote could be delayed until after the July recess.Second,any changes to the proposal in the senate would result in the bill being returned to the lower house for another vote.This could delay the process until December.Our research team made a tri
43、p to Brazil in March and most market participants/political analysts we spoke to have strong expectations that the bill will pass this year.One of the key positives highlighted is that the driver of the reform in Congress is Rogerio Marinho,who was the advocate for the successful Labor Reform during
44、 the Termer Administration(Brazil trip notes,28 March)4.Is there increased risk of contagion from Argentina and Turkey to the rest of EM?No,we maintain the view that there is still limited risk of contagion given two very important differences this year,compared with the EM sell-off last year.First,
45、unlike 2018 when the Fed was hiking once per quarter,we now have the Fed pause and an impending end to quantitative tightening in September.Second,several EM countries boosted their defences last year through monetary tightening.They are therefore on firmer footing this year compared with early 2018
46、.Moreover,prudent central banks like Indonesia and Mexico have so far refused to unwind any of the past rate hikes.So overall,we maintain the view that contagion risk to the rest of EM remains low.Clients questions on EM Fixed Income Rates 2 May 2019 6 Sell in May and Go away?The popular mantra of s
47、ell in May and go away for equities could also be a coincidental omen for EM Rates.EM local bonds around this time last year started to a take a turn for the worse and similarly there are current signs that sentiment is beginning to crack.This time last year,idiosyncratic risks in Argentina and Turk
48、ey triggered a raw nerve in EM.By May,it exposed other high-yielding sovereigns,in particular those with sizeable current account deficits.A doubling of Fed tightening via an acceleration of rate hikes and balance sheet reduction also played a significant part(Figure 1).Bringing this forward to toda
49、y,similar concerns are erupting again in Argentina and to a certain degree,Turkey.However,EM contagion appears to be currently limited,due to the important difference that the Fed pause and an impending end to quantitative tightening brings.Also,we must not forget that several EM countries bolstered
50、 their defences through doses of monetary tightening last year.A quick examination underscores this containment with broad year-to-date tightening of EM sovereign CDS against widening in Turkey CDS and a sharp spike in Argentina CDS(Figure 2).Distress in Argentina is particularly acute with intra-da
