EM Strategy Views:A Bullish 2018EM Outlook...any Questions?

A solid outlook, but what is “good enough” for markets? We expectabove-trend growth in 2018, but the starting point is already a healthy one. Givenmarkets trade growth acceleration and revisions, note that consensus forecastsare less positive (and below our numbers) on 2018 growth than coming into 2017.

    Historically, EM assets withstand up to a 25bp negative revision to consensusGDP without posting negative returns (a low risk in our view).

    What does a “synchronous” growth cycle mean for assets? EM and DM hada ‘synchronized slowdown’ in 2011-12 but diverged from 2013-2015. Thehomogenous improvement in growth rates has not led to high return correlationacross EM assets (though perhaps it has suppressed volatility). We see plenty ofroom for EM return dispersion next year, particularly in FX and local rates.

    Is 2018 “more of the same” for EM Assets? The dynamics of continued stronggrowth suggest EPS and spread compression will continue to be the driver ofequity and credit returns, respectively. However, higher US rates will likelypressure total returns in credit and local rates more so than in 2017. Nevertheless,the levels of yields in EM local bonds (~6.2%) and a constructive EM FX outlook(~2% appreciation) should help cushion duration risk in aggregate.

    Equity - Where is the best growth story? We are tactically bullish on Asiangrowth, both in trade (KR,TW) and domestic (CH,IN) but for 2018 we would focuson where profit margins have room to recover (BR,MX,ID,RUB).

    Credit - Stick with high yield? We expect high-spread credits to continue tooutperform in 2018. This strategy underperforms when spreads widen by morethan 20bp per month, but we see low risk of persistent spread widening.

    Local Rates - Any insulation from US rate risks? BRL, INR, COP, PEN, and RUBlocal rates trade with low beta to US rates; CLP is more sensitive but has a steepcurve. Inflation is supportive in these EMs but will be less so for BRL and INR.

    FX - When to rotate into “Value”? We prefer global growth exposure incommodity-EMs (CLP, PEN, BRL) and Asia Growth FX (KRW, IDR, INR). But“Value” (MXN, ZAR, TRY) has started to recover. We prefer to trade these FX vs.

    their local credits in relative value space.