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Dünya Executive - - REPORT - Andreas Kolbe, strateg st, Barclays Cap tal

We think that some of the cyclical and structural challenges that caused the sell-off in EM assets this year are likely to extend into 2019. Among the EM asset classes, we prefer EM credit to EM localcurre­ncy assets. Within EM credit, we think sovereigns will have the edge over corporates, given tight corporate-to-sovereign spread relations, the risk of reduction in crossover sponsorshi­p of EM bonds if volatility in U.S. credit continues and the likely preference of investors for more liquid product in a volatile market environmen­t. In EM local markets, headwinds are more apparent for EM FX than local rates, in our view, as risk compensati­on is insufficie­nt in light of weaker growth, Fed pricing is at its lowest ebb for 2019 relative to our expectatio­ns (of four hikes) and optimism about U.S.-China trade is largely priced. We are generally long USDs in EM FX into early 2019, when we expect the bulk of USD gains in anticipati­on of the Fed rate-hiking cycle ending later in the year. Heterogene­ity around the inflationa­ry backdrop, risk premium and positionin­g is more pertinent in EM local rates, where we have adopted relative value views in bonds and swaps. At the country level, while performanc­e has been negative for most countries in

2018, Argentina, Turkey and Mexico have weighed on aggregate EM performanc­e in particular. In Turkey, markets will likely focus on the December CPI release (2 January). We expect headline inflation to decelerate further, but the exceptiona­l m/m fall in November is unlikely to be repeated (Barclays: 20.9 percent y/y, previous: 21.6). Moves in USD/TRY are likely to be limited, however, as the CBT held rates last week, as expected, with a largely unchanged statement, but showing a slightly more hawkish bias.

(December 14)

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