EMEA: Trump triggers testing times: Deutsche Bank

Research Team at Deutsche Bank, notes that the sell-off in EM so far has been driven by high exposure to steepening in US rates and bunds, especially where positioning has been heaviest.

Key Quotes

“We will need to see US rates find a ceiling before outperformance can come through. Our US colleagues expect 10Y UST near current levels by end-2016, at 2.25%.” 

“In the medium term, we see a case for divergence among EM with respect to Trump-related fundamentals. We consider trade, politics, and foreign policy/NATO exposure. Within EM, EMEA is the likely “safe-haven” from US politics, with the potential negative impact on Asia and LatAm somewhat easier to price.” 

“In EMEA we now need to focus on European risks, with political events in Italy, France, Netherlands, Germany fast approaching and a key ECB meeting in December.” 

“In the coming months we believe opportunities will emerge:

Stabilization and a potential re-set in Russia-US relations gives us opportunities in credit, FX and potentially rates. In South Africa, idiosyncratic developments should outweigh US-election spill-over, while Turkey’s case is still too complex to call. Baltics aside, we believe medium-term concerns regarding US support for NATO are not as relevant as EU and ECB policies for the majority of CEE/SEE countries. In Ukraine the pressure on the authorities to pass reforms has increased.  

• Russia should be a clear beneficiary, based on politicians statements so far on both sides of the Atlantic, we believe stabilization is within reach. The US President can remove sanctions by a National Security Waiver. We therefore see relative value trade opportunities in Ruble, move to over- weight sovereign credit and selected corporates. In local bonds we favor Russia over South Africa and Turkey due to lower macro vulnerability, higher real rates and stronger disinflationary trend.
• In South Africa idiosyncratic drivers eventually should outweigh high beta to global markets, as long as UST move is supported by expectations of higher growth. We maintain credit overweight and believe a downgrade is unlikely.  
• In CEE we believe PLN will continue to under-perform vs HUF and favor Hungary over Poland and Romania in local bonds. In credit, however we maintain Hungary under-weight on expensive valuations vs rising European political risks, but upgrade Poland to market-weight.
• On Turkey we remain bearish on domestic factors and high beta, despite the recent sell-off.”