ab25 January 2024Global Research and Evidence LabGlobal StrategyAround Emerging Markets in 10 minutesUBS’ strongest views across the 20 biggest EM economiesIn this note we synthesise UBS's macro, FX, equity, rates and credit strategy views on the 23 largest EM economies. We outline the core themes per economy, highlight our preferred trades, and identify key signposts and dates to monitor over the next 6m. See page 3 for our latest trade recommendations and pages 5-7 for 10 key charts.3 key themes for EM investors in H1'241) Fed easing and EM: myth vs. reality. With insurance cuts well priced, EM risk premia highly compressed, and RRP drawdown likely nearing exhaustion, we see Fed easing offering EM limited help from here. 2) China weakness is priced into local equities, but little else. Peaking property completions, infrastructure investment and credit growth point to muted spillovers from expected GDP stabilisation this year. 3) Ongoing EM disinflation to support rates, stabilise equities, hinder FX.Weakening FX fundamentals, but consider tactical longs closer to March FOMCWe remain cautious on EM FX and are focussed on idiosyncratic opportunities. We see three main headwinds for the asset class. 1) Among key 'high-yielders', carry has fallen into the bottom quartile of its post-GFC range (from the 67th percentile a year ago). This carry erosion will likely make it harder for EM FX to look through persistent global trade weakness. 2) EM FX risk premia remains at very low levels, historically consistent with negative total returns over the next 3-6m. 3) Current account improvements in most of EM will now likely stall as domestic demand recovery intersects with flattening China imports. As such, while we would consider tactical longs in EM FX closer to the March FOMC meeting (only 12bp priced), we aren't confident this potential boost will sustain. We continue to see CLP, COP, CZK, HUF and CNH offering weakest risk/reward. Equities: Strong EPS recovery in train; favour Korea/Taiwan on tech upcycle We see a strong earnings recovery (13.2% CAGR for 2024-25E, spearheaded by the recovery in Korea and Taiwan tech) and easing consumer headwinds limiting downside in EM equities. We maintain our YE target of 1020 on MSCI EM. Broadening demand recovery, supply discipline and inventory digestion should support the tech upcycle. Themes driving our market selections include 1) Domestic strength (prefer markets with higher EPS sensitivity to resilient domestic GDP), 2) EM tech upcycle, 3) Falling real yields (prefer markets where returns have higher sensitivity to falling real yields), 4) ability to absorb potentially higher oil prices. We remain OW Korea and Taiwan (Tech upcycle), and inexpensive markets with bottom-up idiosyncratic stories (such as Brazil and Malaysia). FI: Ageing rockstar? The opportunity set may be narrowing after a stro...
