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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)