EMERGINGMARKETSFXROADMAP：ARESOLUTENEWYEAR0116

1、currency strategy emerging markets emerging markets fx roadmap january 2013 issue 95 view hsbc global research at: http:/ *employed by a non-us affiliate of hsbc securities (usa) inc, and is not registered/qualified pursuant to finra regulations issuer of report: hsbc securities (usa) inc. disclaime

2、r we remain constructive on the mxn despite the reform delays and argue the outlook for the cop is good, but not great in asia, we argue that php strength will continue while the idr still faces downside risks in emea, we highlight the declining sensitivity to risk on/risk off (roro) and argue that

3、intervention policies and valuations require a selective approach to investment decisions a resolute new year emerging market (em) currencies have begun 2013 in good cheer, with inflows to dedicated global em funds in the first full week of the year equivalent to 1.3% of assets under management, the

4、 highest figure in almost a year. however, we saw a similar pattern at the start of 2012 and it didnt last much beyond january, so the question is will history repeat itself or can this rally be sustained? certainly some of the external risks we faced a year ago have moderated, notably tail risks in

5、 europe and china. meanwhile, us fiscal and growth worries have also receded. therefore, for now, we are broadly constructive on the outlook for em currencies, albeit with certain caveats and exceptions. in this report, we offer regional overviews, where we outline those currencies we favor, those w

6、e are neutral on, and those we would avoid or even sell short. our current outstanding trade recommendations include being long the cny vs the usd in the short term via ndfs, long the rub vs the basket and short the sgd vs the thb. see page 3 for our latest thoughts on these trades, as well as a wra

7、p up of our 2012 model portfolio performance, where we enjoyed total nominal returns of 28.4% on all our recommendations last year. 3 5 6 16 22 24 31 38 43 47 56 currency strategy emerging markets january 2013 issue 95 contents model portfolio and trade recommendations latam at a glance latam fx: ra

8、ising the curtain on 2013 mexico: delay of reforms a sensible strategy fx strategy: mxn set to appreciate through 2013 cop: good, but not great asia at a glance php: strength to strength idr: back to the future? emea at a glance emea fx: local beats global real effective exchange rates key global ec

9、onomic and fx assumptions currency reference table emerging markets fx strategy biographies disclosure appendix disclaimer 2 30 42 54 57 62 63 abc 1 1- - 1- 2 1- - 1- 1- 1 1- - 1- 1- 1 1- - 2- 1- 1 1- - 1- 1 1- - 1- 1- 1 1 - - 1- 1- 1 1 - - 1- 1- 1 1 - - 1- 1- currency strategy emerging markets janu

10、ary 2013 issue 95 model portfolio and trade recommendations 2012 em trade recommendations abc settle / forward approx. positive / target / value date carry negativeoriginal trade notionalprofit /capital trade entry date entry level stop target closing stop level level rate based on: (where points pe

11、r carry to appl.) day datestatus nomina stop (ref. (usd or l p we are neutral on the clp, cop and uyu and are bearish for the brl and ars fx valuations in the region are quite rich, with the exception of the mxn carry is lower though still attractive, but fx policies will likely be used to limit app

12、reciation abc introduction we are forecasting modest gains in latam fx in 2013 but recommend being selective between currencies. in general, we see the region heading for a cyclical recovery in growth, central banks staying mostly on hold, keeping the latam carry at compelling levels. we also see su

13、pport from a less-fraught external environment this year. we would be more bullish on the region were it not for the risk of intervention and strong valuations. chart1: latam reer vs. 10-year average and peak levels looking out to year-end, we see most potential upside relative to current forward pr

14、ices for the mxn and pen, are broadly neutral on the cop, clp and uyu, and bearish on the brl and ars. valuations are tight we take a look at latam currencies real effective exchange rates (reers), comparing their current levels to the average over the last 10 years, as well as to their peak during

15、that time period (see chart 1 below). as would be expected, the mxn is still the cheapest currency relative to clyde wardle fx strategist hsbc securities (usa) inc. +1 212 525 3345 marjorie hernandez fx strategist hsbc securities (usa) inc. +1 212 525 4109 the 10-year average (4% cheaper) while the

16、ars is the most expensive, trading at 32% richer than its 10-year average. valuation analysis is a key component to our view on both of these currencies. we still expect mxn to trade out of sync with positive fundamentals and thus see room for upside. meanwhile, in argentina an expensive reer will l

17、ikely continue to pressure the government into pursuing a weaker nominal ars strategy. a notable change in the last year source: hsbc, bloomberg 6 currency strategy emerging markets january 2013 issue 95 has been the cheapening of the brl, which is now the furthest from the peak reer, reflecting pol

18、icy actions. we do not see this necessarily opening room for a brl rebound as we expect intervention to prime over long-term fundamentals. from a pure valuations perspective, the brls prior overvaluation relative to the rest of the region has been largely corrected. but in broader terms, most of the

19、 currencies within latam are quite firm, trading well above their historical averages. besides the outlier ars, the currencies that look richest in the region are the cop and the pen. the latter is currently trading at its peak both in nominal vs the usd, as well as reer terms. with currencies alrea

20、dy trading in firm terrain, we probably would have to see further improvement in fundamentals to validate sustained breaks higher, say from the post-crisis highs. while the early 2000s were a fertile time for the region in terms of structural reforms and macro-economic stabilization, currently gains

21、 in productivity and the push for economic reforms are isolated to few cases. finally, expensive long-term valuations help to explain why some authorities in the region remain concerned about fx competitiveness and are either intervening in the market, or considering doing so, in order to prevent or

22、 limit fx strength. in this sense, it is notable that the two currencies that fare the best in terms of valuations namely the mxn and clp are the only ones that are not seeing active intervention by their central banks. the case for this to continue, in our view, is strongest for the mxn. continued

23、clp gains would likely trigger a resumption of intervention by the bcch, we believe. policy differences matter towards the normalization of fx inflows in the region, which both reduce appreciation pressures and increase the efficiency of official intervention efforts. (see latam fx focus: beware of

24、shifting external accounts, 16 november 2012.) this does not mean, however, that markets will not try to push for stronger currencies, especially in the context of reduced tail risks abroad. an improvement in risk appetite is likely to be countered with even more intervention. already we are seeing

25、active intervention in a number of places. in some cases these are involved primarily with usd purchases, such as colombia and peru. but in other cases such as argentina and brazil we are seeing a combination of buying and selling to keep their currencies within desired ranges. elsewhere, such as in

26、 mexico and chile, we are seeing no active central bank intervention, although in the latters case it is quite possible that we see usd purchases resume should the clp become too strong. the only country that appears to be safe from the spectre of intervention is mexico, were we do not expect active

27、 intervention due both to still-cheap valuations as well as a strong commitment by the authorities to orthodox and market-friendly practices. carry is more equal across region yield differentials or carry in the region has become more homogenous. in general, latam implied forward yield differentials

28、 (vs the usd) are now lower than they were a few months ago. chart 2 above shows 1-month yield differentials six months ago and the average over the past month. in most cases latam yields have fallen, either thanks to rate cuts locally or higher local usd rates, or both. abc as has been the case in

29、recent years, we expect intervention to limit currency appreciation potential in the region. in general, we note a trend 7 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% currency strategy emerging markets january 2013 issue 95 chart 2: implied 1-mth forward yields have fallen in recent months 9.0% the one currency w

30、hose carry profile has improved considerably on a relative basis is the abc 8.0% 7.0% 6.0% avg last month7/4/2012 clp. with strong growth and no rate cuts on the horizon in chile, we would expect this trend to continue, increasingly attracting fresh flows from carry hungry investors. not only does t

31、he clp offer the highest rates in the region now, but on a volatility-adjusted basis, it is also the most brlcopclpmxnpen compelling proposition in the region. source: bloomberg, hsbc most notable has been the approx. 300bp drop in cop implied yields, a function of renewed rate cuts amid a slowing e

32、conomy. the contraction in brl implied yields has stabilized, but long gone are the days of the double-digit brl carry. the convergence of brl rates has allowed for the development of a two-way market. the reduction of hedging costs and a reversal of the multi-year appreciation trend have created a

33、new demand for long usd-brl positions. in both cases, we see falling rates as taking some of the gloss off these currencies. as chart 3 below illustrates, the drop in the brl and cops volatility-adjusted carry has been even more dramatic. chart 3: 1mo. implied yield over volatility source: bloomberg

34、, hsbc on a regional level, with sporadic exceptions, the volatility-to-carry ratio for latam has consolidated in positive territory around 0.5-1.0 (see chart 3 above). this implies a much more even playing field for trading one regional chart 4: hsbc latam fx spot and total return forecasts vs cons

35、ensus for end-2013 10% 5% 0% -5% -10% -15% brlclpcopmxnpen consensus end-2013 from spothsbc end-2013 from spot consensus total returnhsbc total return source: hsbc, bloomberg 8 currency strategy emerging markets january 2013 issue 95 currency against the other, thus increasing the appeal of regional

36、 relative value opportunities. indeed, one of our main themes for 2013 is the need to be selective as we see policies and fundamentals leading to more differentiated performance. more on this topic to follow. best and worst performers in 2013 in sum, our preferred pick in the region is the mxn and a

37、re forecasting a year-end rate of 12.15/usd. we are also bullish the pen, but see room for only moderate gains towards 2.50/usd. we are neutral the cop, clp and uyu and are calling for more range-bound trading in these pairs with year-end forecasts at 1780, 490, and 20.0 vs. the usd, respectively. o

38、ur short calls for the year are on the brl, which we expect to fall to 2.30/usd and the ars, where we see room for further depreciation to 6.00/usd. in chart 4 below we summarize our spot fx forecasts for the latam region compared to current rates, and also show how these differ from consensus. we a

39、lso give total return forecasts, which compare year-end forward rates to hsbc and consensus spot forecasts. we find ourselves differentiating from consensus most notably in spot usd-brl, where we look for the brl to weaken by around 11% while the market is looking for just 1%. in terms of total retu

40、rn, we expect a negative return by year-end for long brl positions, compared to a 4% positive total return predicted by the market. elsewhere we are more in line with consensus, although we do expect the mxn to outperform both the forward rate and market consensus forecasts, and on a total return ba

41、sis this is our in the following section we present a more detailed outlook of the individual currencies in latam fx and discuss the key issues. country summaries argentina our economists are looking for a mild recovery of 2.5% in real economic growth, based on improving agricultural volumes and a r

42、ebound in brazil. the recovery, however, remains fragile and is threatened by the possibility of a default and rising inflation (we discuss both below). our base case scenario is for the ars to fall further to 6.00/usd by year-end, this is equivalent to a 22% depreciation. absent these two risks, we

43、 are actually looking for argentina to face fewer constraints in terms of its uses and sources of funds in 2013. this is important because it means: a) less need to tighten fx restrictions further, b) some room for flexibilization of import restrictions though restrictions on other foreign currency

44、purchases are unlikely to change much, save perhaps some marginal flexibility re dividend payments. how does a potential default affect fx policy? the biggest looming event for argentina is the us court of appeals decision over whether the pari passu clauses oblige the argentine government to treat

45、the holdouts equally with other restructured bondholders. as per our economists assessment: “multilateral and cross- border funding both financial and trade-related would suffer if the court ruled against argentina. a default would push the economy into further deleverage, putting economic recovery

46、at risk”. (for more detail see argentina economics still on track when initial press releases announced that the government would submit the fiscal and energy reform to congress in 1q13, we thought this might significantly affect our and consensus projections for 2013 (see mexico economics also empo

47、wering it with faculties to split monopolies. creation of courts specialized in telecommunications due to the complexity of the legal framework that rules the activities in this field. enforce telco regulator cofetels autonomy and decision making capacity. the constitution should be amended to grant

48、 access to broadband. to increase competition in broadcasting, more national networks of over-the-air tv should be auctioned. increase pemexs capacity of exploring and producing hydrocarbons generate a competitive environment in the processes of refinement, petrochemistry and transport of hydrocarbo

49、ns increase faculties of the regulatory authority, the national commission of hydrocarbons, so that it could force pemex to efficiency and transparency requirements develop a strategy focused on creating sources of renewable energy the election and permanence of teaching staff will be elected accord

50、ing to merits and not discretionary the creation of a national institute in charge of evaluating education the national institute of statistics (inegi) may conduct a survey between students and teachers in order to evaluate the school performance data protection and pending access to information it

51、gives the faculties to make public all the information which belongs to any authority, government entity, executive, legislative and judiciary branches, autonomous organisms, political parties, trusts, individuals, legal entities and labor unions. the number of board members was raised to seven inst

52、ead of five previously. the ifai should guarantee the access to public information in case the states institutes in charge fail to do so. source: hsbc 18 currency strategy emerging markets january 2013 issue 95 indeed, this postponement implies that the timing for structural changes will move to 201

53、4 instead of 2013, as we initially expected (see mexico economics 9 november 2012 mexico: fiscal reform: its now or never; 29 november 2012 the mexican president: first steps, firm steps, 13 december 2012 although specific details about the potential reforms are not yet available, we have analyzed a

54、 the main risks for our base scenario include: inflation in 2014 could experience a one-off rise to 5-6% (versus our 2014 forecast of 3.6%) 2014 gdp growth forecast at 3.6% could be lower interest rates in 2014 could be between 50 75bp higher than expected however, longer-term annual potential gdp g

55、rowth could rise to 5% from 3.5%. potential scenario where the fiscal and energy reforms are passed and their impact on taxes and subsidies. we consider the fiscal and energy 19 1.2 1.9 2.0 1.2 6.3 3.0 3.3 currency strategy emerging markets january 2013 issue 95 a 2014 scenario with reforms if the f

56、iscal and energy reforms are passed in q313, indirect tax increases appear inevitable. we have conducted sensitivity analysis to possible fiscal revenue policies, based on discussions with authorities and prior reform proposals. our conclusions include: the rebalancing of the fiscal revenues for the

57、 states and the federal government. the former are mostly limited to property taxes and federal transfers. in this direction, the introduction of sales tax to increase states revenues as well as to increase the efficiency in the property tax collection could be proposed. estimation of new fiscal rev

58、enues and expenditure the increase in resources obtained by increasing or creating indirect taxes and eliminating subsidies will be mainly used for the modernization of the oil company and the creation of a universal social security system, as well as to improve the mix of non-oil and oil fiscal rev

59、enues, reducing the latter. estimation of reforms main revenues % of gdp reduction of federal transfers to states (based on an increase of their revenues: i.e. sales tax) vat additional revenues gasoline subsidy removal no investment in the oil company abc total6.3 the elimination of the loopholes in the value added tax (vat). currently vat is at 16% in most of the country except at the borders. in particular, the main idea would be to increase the rate for many items currently at zero-rate, mostly food; and generalizing the rate to 16.0% for the transactions at the border, which today is at