External debt: OW in Eastern Europe

After enjoying a rebound in oil prices, reduced fears about Chinese growth and the weak dollar, the emerging countries received help from the Brexit.

The British vote reinforces the idea that monetary tightening in the US will be postponed, which is positive for the emerging markets.

With the exception of some countries like Mexico, which has experienced strong currency depreciation, most central banks will be able to go into greater depth in their accommodative stance or accentuate their rate-cut policy – a move favoured by the stabilization of the currency and lower inflation pressures.

External debt: OW in Eastern Europe

Emerging markets are facing the same three risks: the commodity super-cycle, the Chinese hard landing and policy mismanagement, and the hawkish Federal Reserve monetary policy.

The outlook for all risky assets, including emerging market debt, has deteriorated materially after the UK voted in favour of exiting the EU. We will be watching political developments closely and updating our views accordingly.

However, the asset class valuations are still attractive on both an absolute and a relative basis (vs. core rates, IG and HY credit).

Technicals are less supportive, since net issuance is expected to be positive but manageable.

In this context, we are keeping an overweight on Eastern European countries such as Montenegro, Hungary and Croatia. Our still-modest OW the energy complex (Venezuela, Ecuador, Iraq) is partially offset by our UW in Malaysia, Nigeria and Vietnam.

We still like high-yielders with idiosyncratic drivers like Argentina, Brazil, Pakistan, Ghana and Mozambique.

Conversely, we are underweight in MENA countries such as Lebanon (tight valuations, less supportive technicals, elevated political risks) and Morocco (geopolitical risk).

Local curves: still value in local rates

Local rates continue to benefit from EM disinflation and accommodative EM & DM central bank policies. As a result, we see value in local rates and remain OW on this segment. Near-term risks have risen materially after the UK’s EU referendum although this has been partially offset by the rising probability of only one Fed rate hike in 2016.

As a result, we remain overweight on high yielders supported by high real rates such as Brazil, Colombia, Russia, Indonesia and Turkey.

We are underweight in Thailand (elevated political risks, deteriorating fundamentals) and in Peru & Chile amid tight valuations.