On the local curve side

Local Rates will continue benefitting from EM disinflation and accommodative EM and DM central bank policies. We continue to see value in EM Local Rates and remain OW. Near term risks have increased somewhat around the Brexit vote and EMFX volatility. We expect to see near term positive/negative reactions on the Remain/Leave UK vote.

We keep our overweight on all high yielders with a bias to Latal, such as Brazil, Mexico, Colombia, Russia and Indonesia. Indeed, begnin inflation outlook with favorable base effects, tight monetary policy should keep favoring the belly in the long end.

We are underweighted on Tahilans amid elevated political risks and fundamentals’ deterioration, and in Peru and Chile (tight valuations). 

Positioning on External Debts

The main medium term risks to the EMD asset class - China hard-landing and policy mismanagement, the end of the commodity super-cycle and hawkish US Federal Reserve  monetary policy -  have subsided YTD.

Asset class valuations are still attractive both on an absolute basis (relative to post GFC history) and relative basis (vs Core Rates and IG and HY Credit). Asset class technicals are less supportive since the net issuance is now expected to be positive but issuance is manageable and investor positioning is not over-extended.

Consequently, we are overweighted on Eastern Europe countries via Hungary, Serbia and Montenegro.

We have a modest exposure to the energy complex via Venezuela, Ecuador and Iraq partially offset by underweights in Malaysia, Nigeria and Vietnam.

We keep our positions on high yielders with idiosyncratic drivers like Argentina, Brazil, Pakistan, Mozambique and Ghana.

Finally, we hold a structural underweight on MENA countries such as Lebanon (thight valuations, less supportive technicals, elevated political risks), and Morocco (supply and geographical risks) while keeping underweights in lower beta credits with deteriorating fundamentals (China, South Africa) or limited upside (Panama, Uruguay, Chile).