HALISTER1: ROUNDUP: How Banks Are Looking to Trade CEEMEA After Brexit

ROUNDUP: How Banks Are Looking to Trade CEEMEA After Brexit

(Bloomberg) -- The U.K. vote to leave the EU has buoyed optimism on regional EM assets, which are seen benefiting from more accommodative policies from global central banks.
  • With the global risk-off event seen as a potential catalyst for an emerging-market rally, here is how some banks are looking to trade it in CEEMEA assets, based on interviews with and research published by analysts.
  • Citigroup (Luis Costa)
    • Says Brexit added to the impact or the perception of low growth in global assets; favors fixed income over FX in post-Brexit environment
    • Likes TURKGBs and SAGBs, the main high-yielding government bonds in the region
    • Citi currently invested in SAGBs, expects further rally to 9.10-9.00% given the low-growth environment
    • Closed exposure to to OFZs as RUB fixed income, which was a “great buy” a few months ago, is now seen too expensive
  • Bank of America Merrill Lynch (David Hauner)
    • Long PLN vs short HUF seen as best CEEMEA trade after Brexit vote
    • Hungary seen more affected by a EU slowdown than Poland, which is bigger and fiscally stimulated
    • Moreover, positive news on Polish policies (on FX mortgages, pension funds and tax-free allowance) has been swamped by Brexit noise
    • Trade also against very bearish PLN consensus
  • Morgan Stanley (Hans Redeker)
    • See attractive risk/reward in long EUR/CZK; seen as a defense trade on the idea that the peg would go, and as cheap insurance against this risk
    • This would require bearish euro-zone events coming up leading to large capital outflows
    • Bank entered long EUR/CZK position ahead of the U.K. vote; pair has proven to be remarkably resilient post- Brexit, potentially indicating that the cross was already too high relative to fundamentals
  • Societe Generale (Roxana Hulea, Phoenix Kalen)
    • Investors likely to re-engage in EM markets with central banks amplifying the available liquidity and reviving the allure of the asset class
    • Recommended a long position in the on-the-run 10y benchmark POLGB after U.K. vote; yield target at 2.67% and a stop-loss at 3.37% and a trading horizon of 2 to 3 months
    • Valuations favor EM rates; see compelling value in CEEMEA local rates and bond markets
    • EM currently offers 1.90% premium in real interest rate spread (using 5-year rates) over USD rates, not far off the highs of the past 6 years
    • In CEEMEA FX, expect differentiation between USD bloc currencies vs EUR bloc, with faster recovery in the USD bloc currencies; CEE currencies are likely to experience more protracted pain from direct adverse economic consequences of Brexit
  • Rabobank (Piotr Matys)
    • Expect ZAR and TRY to outperform EM peers as those currencies offer the highest yields; former particularly sensitive to change in global sentiment
    • Says with EM bonds offering substantial yields in current ultra low yields global environment, asset class to witness fresh capital inflows on expectations that major central banks will provide more stimulus, Fed unlikely to raise rates in the coming months
  • NOTE: See EMFX MONITOR here: Prospect of Easy Policy on Brexit Fuels CEEMEA
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

People
David Hauner (Merrill Lynch International)
Hans-Guenter Redeker (Morgan Stanley)
Luis Costa (Citigroup Inc)
Phoenix Kalen (Societe Generale SA)
Piotr Matys (Rabobank International)

Topics
Leveraged Finance

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