EMEA Monthly:Renewed focus

With political noise subsiding, and relative calm in the global markets, we canfocus on country specifics which are generally supportive in the region. InTurkey, we continue to expect 3.4% growth in 2017. FX-adjusted credit growthexceeded 30% (WoW, 13wma, annualized) in April thanks to the CreditGuarantee Fund. In Russia, disinflation trend continued as we anticipated. Webelieve inflation will dip under 4% (4.1% in April) in the coming months andstill expect total 200bps cuts in 2017. In CEE we continue to expect domesticdemand to remain strong. The exception is South Africa where we haverevised annual growth down for a second time since March (to 0.6% in 2017,recovering to 1.7% in 2018 (previously 2%)) and put rate cuts back on the table.

    Inflation is less of a concern for us in the coming months. In South Africa,inflation surprised to the downside in March falling to 6.1% while core droppedto 4.9% - the lowest in four years. Inflation in CEE also eased off somewhat inApril (Czech 2.0%, Hungary 2.2% and Poland 2%) as base effects wane andcommodity prices have stabilized. In Turkey, may likely peaked in April (11.9%).

    In this monthly we also introduce a special report on GCC. We see Bahrain,Oman and Saudi Arabia in the weaker category according vs. Kuwait, UAE andQatar. In the near term, we are less concerned about dollar pegs, partially dueto the ability of the SWFs to provide buffers. The exceptions are Bahrain andOman, but we believe that broader GCC will likely protect this peg for the timebeing. These views were largely echoed during our recent trip to the region.

    In Fixed Income, keep flatteners in Hungary but remain similar to Poland morecautious on outright long-end bonds. In Turkey keep 1Y XCCY receivers, butturn more cautions on long-end bonds. In Russia keep short-duration trades inOFZs and receive 1Y IRS (vs Mosprime). In South Africa expect 10Y SouthAfrican bonds to range trade (8.65%-8.95%) in the next few weeks but positionfor ASW-spread tighteners. In Israel are long 3Y fwd 1y rates or 5Y5Y IRS vsUSD. In Czech enter 6x9 FRA payers as not enough hikes priced. In Romaniamove from “underweight” to “tactically long” on valuation and favour Feb-25.

    In EM FX, we rotate away from the commodity currencies (RUB, ZAR) towardsmanufacturing currencies (TRY, ILS). We recommend: long TRYZAR, long 3mUSDTRY digital puts, short USDILS and short EURCZK.

    In Sovereign credit we stay underweight on South Africa and position forfurther underperformance vs. Turkey, for which we stay neutral. We also retainmarketweight on Russia on tight valuation. We stay neutral on Ukraine, whichhas strongly recovered over the past month and its valuation cushion reduced.

    We retain a neutral position on Hungary.

    In Corporate credit, we note that CEEMEA corporate bond performance hasbeen flat on a QTD basis, with the exception of Turkish credits which haveoutperformed its regional peers while Russian credits underperformed. Overall,we acknowledge that valuations look rich in the historical context, however,strong technical (inflows into EM) and improving fundamentals (strong 1Q17earnings momentum, cyclical growth in major EM economies, low defaultrates etc) can push spread further tighter on a selective basis.