SEB sees better times ahead for two BRIC economies

Low interest rates in developed markets and continued policy stimulus in China ahead of the leadership transition next year look set to further whet the appetite for emerging market (EM) assets, suggests Nordic corporate bank SEB.

In its latest report, Per Hammarlund, the bank’s chief EM strategist, comments: “The rally in EMs this year has further to run. The main risks to the generally positive outlook are, conversely, an unexpected jump in inflation and a sharply hawkish turn by the US Fed, as well as a hard landing in China.

“However, low global inflation and loose monetary policies look likely to persist in most advanced economies. In addition, while policy makers in China will reduce monetary stimulus to cap excessive credit growth, they will step up fiscal policy stimulus.

“As a result, the conditions are in place for global risk appetite to remain strong and for the EM rally to continue, albeit at a slower pace than during the first half of the year. In an environment when commodity and oil prices do not fall continuously, investing based on expected carry should generate good returns.”

The report examines the prospects for the currency and interest rates for key EM economies, including the so-called BRICs (Brazil, Russia, India, China):

  • Brazil: “The Brazilian real (BRL) involves high risk, even by EM standards. However, with the economy set to grow next year, reforms to be implemented, and yields around 10%-11%, the BRL is attractive. It remains one of the favoured long currencies in our FX carry trade model.”
  • India: “The Indian rupee (INR) looks set to weaken somewhat at the beginning of the fourth quarter as measures introduced in 2013 to stabilize the INR expire. The INR should strengthen from there due to attractive yield and stronger economy. The latter part of Q4 will be a good time to build long INR positions.”
  • Indonesia: “For rates, we prefer steepeners or paying the back end since we expect some recovery in economic growth and inflation expectations to rise. We think receiving front end will also work as we expect another 25 basis points (bps) of rate cuts into 2017.”
  • Russia: “The recession is bottoming out and oil prices have stabilized, both of which will support the Russian ruble (RUB). With yields around 8%, the RUB is one of our favourite long carry trade targets.”


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