1、April 29,2019 11:09 AM GMTJames.LJaiparan.KFilip.DSimon.WAndres.JIoana.ZGilberto.Hernandez-GMin.DChun.Him.CBelle.CMORGAN STANLEY&CO.INTERNATIONAL PLC+James K LordSTRATEGIST+44 20 7677-3254Jaiparan S KhuranaSTRATEGIST+44 20 7677-6671Filip DenchevSTRATEGIST+44 20 7677-3166MORGAN STANLEY&CO.LLCSimon Wa
2、everSTRATEGIST+1 212 296-8101Andres JaimeSTRATEGIST+1 212 296-5570Ioana ZamfirSTRATEGIST+1 212 761-4012Gilberto A Hernandez-GomezSTRATEGIST+1 212 296-8940MORGAN STANLEY ASIA LIMITED+Min DaiSTRATEGIST+852 2239-7983Chun Him CheungSTRATEGIST+852 2239-1261Belle ChangSTRATEGIST+852 3963-0668Institutional
3、 Investor Global Fixed-IncomeResearch Polls are now open.We hope youhave enjoyed our research over the past yearand appreciate your support.Request yourballot.Turning neutral on local marketsSaudi Arabia:Taking stock.Asset allocation;Trades overview Snapshots;Live trades:Rationale and risksGlobal EM
4、 StrategistGlobal EM Strategist|Global GlobalThe Rally Fizzles OutWe remove our bullish local markets call.EM is lacklustredespite positive catalysts,while new risks have emerged.Westill believe EM will be stronger by year-end but the startingpoint of the next stage of the rally has been pushed back
5、 a bit.Back down to neutral:We remove our bullish EM local markets call,put onabout a month ago,and turn neutral.Some elements of our bullish view cametogether,such as a dovish Fed and a stabilisation in China.Yet,EM has not pickedup and new risks have come onto the horizon,with US-Europe trade rela
6、tionsand risk of a supply side-driven rise in oil prices key among them.Both these riskswould impact EMFX negatively,spilling over to rates.At the same time,FXweakness is likely temporary and we believe a weaker USD will spark an EM rallylater in the year,but with some near-term headwinds and fewer
7、positivecatalysts we do not think the time is right to be pushing a bullish call right now.Waiting for the spillover:A key element of our bullish view rested on Chinasgrowth pick-up spilling over into the rest of the world,and Europe in particular(a higher EURUSD is needed to unlock gains in EM).Tot
8、al social financing inChina is the key metric indicating stabilisation in activity,and past cycles of creditgrowth show it can take many months for a trough to feed through into strongerimports.In our overview we explore what the greater consumption focus ofChinas stimulus implies for trading partne
9、rs.The beneficiaries differ from aninvestment-focused stimulus cycle.Take profit on long INDOGBs,remove short USDZAR:We take profit on our 10ylong INDOGB position and also remove our like on IDR.Indonesia is sensitive tothe rise in oil and recent trends could hamper the trade balance.Positioningrema
10、ins heavy too.We remove our short USDZAR hedged with 5y SOAF CDStrade but enter short EURBRL 3m NDF and receive 1y CNY NDIRS:Our metricsshow high risk premia in BRL and positioning is long USD.Local sentiment hasdeteriorated.Risk/reward favours BRL now.We recommend receiving 1y CNYNDIRS as we expect
11、 the PBOC to keep liquidity ample.Elsewhere,we stick withlong PLNHUF,short EURRUB and long 10y Mbonos(FX hedged).Saudi Arabia credit still offers value:Markets are pricing in significant supply riskpremia in the KSA eurobond curve,which we think should be factored out due toample new issue absorptio
12、n capacity in international and domestic markets.Therecent oil price strength,2019 borrowing plan release and likely pent-up demandfor Saudi bonds by domestic banks underscore our view.Instead of chasing GCCbonds in secondary markets,we think most investors have opted to cover theirunderweights in G
13、CC IG via primary markets.However,supply will decline overRamadan but the GCC weight in EMBI will continue rising,meaning investors willhave to add risk via secondary markets.We still see value in the KSA curve,especially 29S.Corporate issuance should not be an overhang on spreads.Due to the nature
14、of the fixed income market,issuers orbonds of the issuers recommended or discussed in thisreport may not be continuously followed.Investors mustregard this report as providing stand-alone analysis andshould not expect continuing analysis or additional reportsrelating to such issuers or bonds of the
15、issuers.Morgan Stanley does and seeks to do business withcompanies covered in Morgan Stanley Research.As aresult,investors should be aware that the firm may have aconflict of interest that could affect the objectivity ofMorgan Stanley Research.Investors should considerMorgan Stanley Research as only
16、 a single factor in makingtheir investment decision.For analyst certification and other important disclosures,refer to the Disclosure Section,located at the end of thisreport.+=Analysts employed by non-U.S.affiliates are not registered withFINRA,may not be associated persons of the member and may no
17、tbe subject to NASD/NYSE restrictions on communications with asubject company,public appearances and trading securities held bya research analyst account.1 Turning neutral on local marketsJames Lord,Min Dai,Chun Him Cheung,Filip Denchev,Ioana ZamfirWe remove our bullish call on EM local markets and
18、turn neutral.Elements of our viewhave played out(dovish Fed,improvement in China)but markets have not moved inour favour,and we see fewer clear positive catalysts on the horizon.On the plus side,China should continue to pick up,and we outline some of the countries that couldbenefit from the greater
19、consumption focus of Chinas stimulus.However,the benefitsto the rest of the world could be less than what might be expected from aninfrastructure boost in China,given evidence of lower import intensity of consumption.Moreover,it could take some time for the spillovers to take place and markets are n
20、otin the mood to price this is in in advance,particularly with other looming concerns.Forexample,US-Europe trade escalation is now an immediate risk.We remove our shortUSDZAR(hedged with 5y CDS)trade and take profit on long INDOGBs,andrecommend receiving 1y CNY NDIRS and selling EUR/BRL 3m NDF.We st
21、ick with ourbullish RUB call(funded now in EUR)and long MBonos(FX-hedged).We have decided to close our bullish call on EM local markets,and turn neutral:Whileelements of our bullish thesis have played out(China growth pick-up,dovish Fed,US-China trade de-escalation),others havent yet(spillover of Ch
22、ina growth pick-up),andthere are additional risks emerging that we hadnt originally factored into our base casebut now take more seriously(the risk of a supply-side oil price rise,US-Europe tradeescalation).However,we expect any near-term wobbles in EM local markets to berelatively short-lived as po
23、sitioning is not heavy,and this should provide a renewedbuying opportunity(hence why we do not move outright bearish).Indeed,we do thinkthat the growth pick-up that our economics team is expecting in the rest of the worldwill ultimately be a boon for EM,via a weaker USD.But timing is key and,while w
24、e wait,some additional risks have emerged.Weaker DXY key:As we have been discussing,a weaker DXY and higher EURUSD arekey to unlocking gains for EM local currency product.This is shown in Exhibit 1,whichhighlights how our estimate of risk premia in EM currencies has evolved over time.Lower levels of
25、 risk premia(i.e.,the higher the lines go in the chart)would suggest thatEM currencies are rallying more than would be fair,given global macro factors alone(one of which is USD).After reaching cheap levels at the end of last summer,highyielders are now a bit too strong based on USD trends.In other w
26、ords,we think thatUSD needs to weaken in order for EM to kick into a higher gear.2China picks up,but so far picks up alone:Our China call has worked out nicely,withdata clearly rebounding over the past few months.Credit growth has accelerated withbetter PMIs,while VAT cuts have only just kicked in,a
27、ll setting the stage for a recoveryin GDP over 2019.However,so far there is no evidence of this stabilisation in Chinafeeding through into other parts of the world.Chinas 1Q GDP surprised on the upsidebut this was of no benefit to Korea,for example,where 1Q GDP growth came in at theslowest since pac
28、e since 2009.Korea exports for the first 20 days of April were alsoweaker than expected,while Taiwans industrial production data have been poor too.Asfor Europe,data remain lacklustre.As we discussed in last weeks FX Pulse,there areunsurprisingly lags between a growth recovery in China and the spill
29、over to the rest ofthe world.As such,the lack of a pick-up in other parts of the world should not come ashuge surprise.However,what is surprising is that markets have been unwilling to price inand anticipate an eventual recovery in the rest of the world.China consumption still benefits the rest of t
30、he world.Much has been made of thefact that Chinas stimulus is more focused on boosting consumption rather thaninfrastructure investment in this cycle.This has led some to conclude that the stimulusto demand is more domestically focused i.e.,more geared at boosting domesticproduction rather than imp
31、orts.This could be one reason why the market has not pricedin a recovery in other parts of the world.However,we think that this is wrong.Commodity exporters that have benefited from prior stimulus might not benefit somuch this time,but China still imports a substantial portion of consumer goods from
32、 therest of the world.We think that during this round of stimulus,those countries thatexport an outsized share of consumer goods to China will stand to benefit more ascompared to previous rounds of economic stimulus.especially those exporting consumer goods to China:In Exhibit 3,we split Chinasimpor
33、ts into consumer goods and industrial goods using the heading provided in HScoding convention(see footnote for how we define consumer versus industrial goods).With this breakdown,the jurisdictions that we identified to benefit the most from thisconsumer-led rebound would be New Zealand(dairy product
34、s),Taiwan,Malaysia andSouth Korea(consumer electronics)and,to a lesser extent,Singapore and Japan(alsoconsumer electronics).Traditional large exporters to China such as Australia,Germanyand the US may benefit less as their exports tend to be more heavily focused oncommodities or capital goods(absent
35、 any specifics due to a potential US-China tradedeal).However,we note that we include autos in the industrial goods component as theExhibit 1:Risk premia low for HY EMFXSource:Morgan Stanley ResearchExhibit 2:IDR and CNY are expensive;RUB,COP and BRL are cheapSource:Morgan Stanley Research3classific
36、ation groups include it with other industrial transportation such as rail,trackswitches and signals.Autos make up around 15%of Germanys exports to China.Our findings suggest that investment is more import-intensive:In terms of marginalstimulus to the world,historically,increases in nominal investmen
37、t appear to have ahigher import intensity as compared to increases in nominal consumption.Specifically,we have found that for every percentage point increase in nominal investment,thistends to increase the imports of capital goods by around 3.6%,while consumption tendsincrease imports of consumer go
38、ods by 2.4%.Intuitively,we find this to be consistentwith our understanding as consumption is more affiliated with the service sector and is,by nature,less tradeable.The reduced emphasis on infrastructure spending would meanthat,for every yuan spent,less will spill over into the RoW as compared to p
39、reviousepisodes of Chinese stimulus.Exhibit 3:Breakdown of Chinese imports(12m sum,US$million)ConsumerGoodsIndustrialGoodsOther GoodsChina TotalImportsConsumerGoods as%of TotalAustralia8,6791,55796,378106,6138.1%Canada4,1694,10321,69829,97013.9%France6,20422,3235,47334,00118.2%Germany15,80665,61124,
40、474105,89114.9%Indonesia7,8223,27222,00233,09623.6%Italy4,5009,7096,81421,02421.4%Japan47,68778,97651,376178,03926.8%South Korea95,79549,19651,730196,72148.7%Malaysia37,2366,91020,12964,27557.9%New Zealand6,8307613,64811,23960.8%Russia2,9471,28055,08459,3125.0%Singapore9,8889,30614,17733,37129.6%Spa
41、in2,0962,6623,7838,54124.5%Sweden6235,1053,1338,8627.0%Switzerland1,5004,76227,01433,2774.5%Taiwan115,20525,61934,101174,92665.9%Thailand11,10913,40720,29944,81524.8%UK1,97411,20410,51023,6888.3%US26,26162,75453,155142,17018.5%Source:Haver Analytics,Morgan Stanley Research;Note:We define consumer go
42、ods as HS Code categories from 01-24;50-63 and 85;industrial goodsas HS Code categories 28-38;84;and 86-89.For more info behind HS coding convention,see UN Comtrade.Exhibit 4:Historically,a marginal increase in investment has yielded alarger response as compared to consumptiony=2.407x-9.1394y=3.6259
43、x-14.342-20-100102030405060246810121416ConsumptionGross Capital FormationImport of goods(consumer/industrial)Growth(as component of nominal GDP)Source:Haver Analytics,Morgan Stanley ResearchExhibit 5:Our economists expect this round of Chinese stimulus to bemore shallow and more consumption-oriented
44、 than in the past10.52.42.31.514.85.741.90246810121416200920132015-20162019EAggregate Fiscal Deficit Expansion,ppt of GDPRebound in Broad Credit Growth,ppt%Source:CEIC,Morgan Stanley Research4In accordance with the time lags we had previously estimated,we think that RoWgrowth will rebound once the e
45、ffect of the Chinese stimulus eventually sets in.Whenthese positive growth spillovers occur,we expect this to be risk-positive for RoW and itshould bring about another round of USD weakness.However,as Exhibit 5 shows,oureconomists anticipate this round of stimulus to be much milder as compared to pr
46、eviousrounds,so investors will need to be realistic in the degree of support China will offer tothe world economy in 2019.But in the meantime,while we wait for the Chinese recoveryand the associated spillover,other risks that we had not incorporated into our base casehave emerged.Auto tariff risks:O
47、ne of the risks to global growth,EUR and EM is the prospect of tradeescalation between the US and Europe.The official public commentary on this topic hasnot been encouraging and our public policy strategy team now sees auto tariffs as abase case during 2019,with a May announcement and 3Q implementat
48、ion following aninitial waiver period the most likely outcome.As such,this is a risk we can no longerpush to the back of our mind.There is a good case to be made that the tensions couldbe temporary,with Congress potentially clawing back Section 232 tariff authority and anegative market reaction ince
49、ntivising an agreement.Nonetheless,the market impact,even if just temporary,would be negative for EM.There will likely be a response fromEurope too,so the fallout would not be limited to those that are simply part of theauto supply chain.Growth would likely suffer in both regions,possibly promptings
50、pillover into other trading partners.Exhibit 6 and Exhibit 7 show the EM tradeopenness versus the US and eurozone,along with the overall size of the trade balances.Oil price risks:Our oil strategists have revised their oil forecasts higher.With waivers forcertain countries importing Iranian oil expi
