M Global IdeaGlobal EM StrategistNo Sliding Out of DMsMorgan Stanley & Co. International plc+James K LordStrategist James.Lord@morganstanley.com +44 20 7677-3254 Neville Z MandimikaStrategist Neville.Mandimika@morganstanley.com +44 20 7425-2509 Pascal N BodeStrategist Pascal.Bode@morganstanley.com +44 20 7425-3282 Morgan Stanley & Co. LLCSimon WaeverStrategist Simon.Waever@morganstanley.com +1 212 296-8101 Ioana ZamfirStrategist Ioana.Zamfir@morganstanley.com +1 212 761-4012 Emma C CerdaStrategist Emma.Cerda@morganstanley.com +1 212 761-2344 Eli P CarterStrategist Eli.Carter@morganstanley.com +1 212 761-4703 Morgan Stanley Asia Limited+Min DaiStrategist Min.Dai@morganstanley.com +852 2239-7983 Gek Teng KhooStrategist Gek.Teng.Khoo@morganstanley.com +852 3963-0303 The US is still too strong for EM to handle, especially as the EM rate differential versus the US falls further. This is likely to keep EM assets on the back foot and lagging risk in general. We leave our USD longs in place, namely THB, PHP and CLP. Sovereign credit is all about alpha at this point. FX & EM Strategy: While the year-to-date divergence in performance between EM and DM is notable, with both EM FX and bonds lagging, it is consistent with the divergence in both flows and economic data surprises. Positioning by EM-dedicated funds is cautiously optimistic but with room to add more risk. However, to see more sustained gains for EM it needs a less US-centric Goldilocks scenario, with China in particular playing a more positive part, while the path of rate differentials between EM and the US needs to slow its narrowing. For EM credit, the additional positive would be market access and debt workouts for the lowest-rated countries. Sovereign Credit Strategy: Our overall view remains on the more cautious side, with a preference for lower-beta credits across the IG and BB space. For the lower-rated credits, it's clear that idiosyncratic drivers are key across the space, as evidenced by recent volatility, with alpha more important than beta at this point. We reinforce our like stances on Angola, Argentina, Egypt, El Salvador and Ghana in addition to outright Venezuela long trade recommendations. Changes this week include adding Kenya as a like stance and initiating on Senegal with a preference for dollar (2048) paper versus euro paper. Against this stand dislike stances on Colombia, Ecuador and Nigeria. However, one important macro driver would be if there is a de-escalation in Middle East tensions. We see Jordan and Israel bonds as sensitive to such an event and think that curves would likely steepen. Our existing like stances on Saudi Arabia and Egypt should also align. On the other hand, if it leads to lower oil prices, it would put pressure on weaker oil exporters. LatAm Macro Strategy: In light of recent volatility in US rates, we revisit one of our favourite analyses from last...
