Emerging Markets are unsafe haven

Theme: EM is an unsafe haven. Sort to short through FX

As banks shrink balance sheets aggressively, banking sector activities are redrawn along national (rather than global or regional) lines as national champions and projects are prioritised. The United States probably does better (or rather less worse) than most other places in an ‘Absolute Advantage’ world where the domestic political imperative of employing people to make things domestically outweighs most else. More trade dependent, FDI dependent economies are more immediately vulnerable. Focus on countries most exposed to shrinking global bank balance sheets, those countries with high foreign ownership of domestic banks and where banking systems are large relative to the size of the economy. Emerging Europe is a clear area for caution here.

Focus on currencies which look richly valued in real terms. Focus also on countries with large current account deficits and large external financing requirements for 2012 as accessing someone else’s surplus savings to finance or roll over becomes more difficult and more expensive. Be wary also of EM countries where fiscal debt dynamics look most flaky. Think also about countries where currency adjustment in the late 2011 sell-off looks smallest relative to the scale of those currencies’ depreciation during say the 2008-09 global financial crisis (a crude ‘catchup’ currency risk proxy).

Be wary also of currencies of countries which look richly valued in real terms.

Finally, in a deleveraging world, the most owned market positions globally also become potentially the most vulnerable. Large parts of emerging markets are potentially at risk in this context, those markets that were on the receiving end of portfolio inflow frenzy during the global ‘false start’ recovery period from mid 2009.

In Turkey we observe: a 10%+ current account deficit, an external financing requirement of USD200bn, and the risk of accelerated European bank deleveraging which could mean that Turkish banks/corporates will find it more difficult to roll-over ST external liabilities which are very significant (~ USD132bn). Reserves shrink and a rich real exchange rate falls via nominal depreciation.

Hungary is an alternative where raising rates to defend currency is a red rag to a Central European FX bear.

Trade: Buy USD/TRY.

Alternative: Buy USD/HUF.

Dollar / Hungarian Forint

from RBS Top Themes & Trades 2012


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