Table of Contents
List of Figures xiList of Tables xvi
Introduction xvii
Acknowledgements xxi
Acronyms xxiii
Chapter 1 EMFX and Fixed Income: Where the Opportunities Lie 1
1.1 EM Debt – Growing Too Fast to Ignore 1
1.2 Returns Too Attractive to Ignore 4
1.3 EM as an Alpha Opportunity 7
1.4 Scope for Even More Alpha 9
1.5 Summary 12
Chapter 2 Global Macro Rules 13
2.1 What You Need to Get Right: 65% Global, 35% Local 13
2.2 When the US Sneezes, the World (Still) Catches a Cold 18
2.3 EM Central Banks Stimulate as Fast as Markets Allow 20
2.4 When Bullish on US Rates, EM Rates Outperform EM Credit 22
2.5 When Bullish on EUR, Overweight CEEMEA Over Asia 26
2.6 When Bullish on Commodities, Overweight Latam Over Asia 30
2.7 Risk Aversion Barely Hurts EM Rates 34
2.8 Rising US HY Spreads Worse than Rising VIX 37
2.9 Summary 38
Chapter 3 China: The Only Emerging Market that Counts 40
3.1 Global Business Cycle Made in China 40
3.2 The Commodity Link 42
3.3 On Leverage 44
3.4 Current Account Surpluses No More 45
3.5 Enter the Capital Account 46
3.6 Reading the CNY Tea Leaves 48
3.7 CGBs: The JGBs for Millennials 54
3.8 The Grand Decoupling? 56
3.9 Summary 57
Chapter 4 How to Trade EMFX 58
4.1 Only the JPY is Special 58
4.2 No Helping Hand from EM Rates 60
4.3 Carry Works – if You are Japanese 62
4.4 Current Accounts: Measuring Risk the Old-fashioned Way 68
4.5 Going for Growth 72
4.6 Modest Value in Valuation 74
4.7 Terms of Trade 76
4.8 Technicals to the Rescue 77
4.9 Flows Follow; Don’t Follow the Flows 81
4.10 Positioning with Positions 85
4.11 Going with the Seasons 86
4.12 Volatility: Foe, Not Friend 87
4.13 Summary 88
Chapter 5 How to Trade EMFX: Event Guide 90
5.1 Chaining the FX Vigilantes 90
5.2 Intervention at Work 91
5.3 Emergency Rate Hikes – Only for Emergencies 95
5.4 Capital Controls, IMF, or . . . China 98
5.5 IMF Packages Stabilize FX – Eventually 103
5.6 EM Elections: Of Market Foes and White Knights 104
5.7 Trading Data 108
5.8 Summary 111
Chapter 6 How to Trade Emerging Market Rates: The Cycle 112
6.1 Emerging Markets: A Definition for Rates Traders 112
6.2 The Structural EM Trade is Dead; Long Live the Cycle 114
6.3 US Lessons for EM Rates: Turning Points 116
6.4 US lessons for EM Rates: After the Turn 120
6.5 The Power of Patience: Receive Around the Last Hike Until the Last Cut is Close 121
6.6 More on Patience: Pay into the First Hike Until the Last Hike is Close 122
6.7 Steepeners: Receivers for Chickens 123
6.8 Flatteners: Payers for Chickens 125
6.9 How to Trade QE 127
6.10 It is Tough to be an EM Central Banker 129
6.11 EMFX as an Unpleasant Constraint on EM Central Bankers 130
6.12 Commodity Prices as an Unpleasant Constraint on EM Central Bankers 132
6.13 The Fed as an Unpleasant Constraint on EM Central Bankers 136
6.14 Inflation Forecasting in EM 136
6.15 Peaks in Inflation as the Holy Grail 139
6.16 EM Rates: Trading the Cycle in the Front 140
6.17 EM Rates: The Impact of US Treasuries 145
6.18 EM – Steeped in Risk 147
6.19 Does Valuation Work? 150
6.20 Term Premia: Use Sparingly 152
6.21 Sliding Down the Slope 154
6.22 Fiscal: Falling Flat 155
6.23 Summary 156
Chapter 7 Real Rates: Simply Superior 157
7.1 Buy Linkers and Sleep Well 157
7.2 How to Sleep Even Better 159
7.3 What is Fair? 162
7.4 Or is it Structural? 166
7.5 Summary 167
Chapter 8 How to Trade EM Rates: Event Guide 168
8.1 Trading Data 168
8.2 Learn to Love Negative Carry 172
8.3 Being Inclusive Pays Off Nicely 173
8.4 Trading Domestic Disasters 175
8.5 Summary 176
Chapter 9 How to Trade EM Credit 178
9.1 The Structural Trade is Dead: Long Live the Cycle 178
9.2 Carried Away by Momentum 182
9.3 Finding Your Sweet Spot 185
9.4 The Warren Buffett Trade in EM Credit 186
9.5 Improving on Buffett 187
9.6 Credit Selection According to Ray Dalio 189
9.7 Pegs Make it Worse 193
9.8 IMF: What is it Good For? 194
9.9 Embrace Defaults 196
9.10 Of Credit Curves 199
9.11 Evaluating Value 200
9.12 Rating Agencies: Late, but Market Moving 203
9.13 External versus Local 206
9.14 Summary 208
Chapter 10 Portfolio Construction 210
10.1 Smarter with Benchmarks 210
10.2 Frontier Markets at the Frontier 213
10.3 Portfolio Allocation without Markowitz 214
10.4 Derivatives: Weapons of Mass Alpha 216
10.5 ESG and EM: Not Fair! 217
10.6 Summary 222
Chapter 11 The (Near) Future: Big Data, Machine Learning, and What if There are No Emerging Markets Left 223
11.1 Big Data is Coming to Fixed Income 223
11.2 Machine Learning: Supervision is Needed for Supervised Learning 227
11.3 No Disappearing Act for Emerging Markets 228
11.4 Summary 231
Appendix A
Basic Concepts 233
Bibliography 235
