Going with the flow Andreas Kolbe,

Dünya Executive - - REPORT - econom st, Barclays Cap tal

The global macro environmen­t remains favorable for emerging market assets, in our view. As central banks continue to fine-tune their recent dovish shift, there is mounting evidence of stabilizat­ion of economic activity – not least in China - amid ongoing stimulus measures and prospects of a US-China trade deal. Meanwhile, commodity prices remain well supported. Despite this favorable backdrop, EM asset performanc­e has been mixed recently. After a very strong January, EM local market returns at the index level have been broadly flat since the beginning of February, while EM credit return accumulati­on has also slowed significan­tly, with some HY-IG decompress­ion over the past few trading sessions (based on the Bloomberg Barclays local-currency government bond and USD EM Aggregate indices, respective­ly). We think crowded positionin­g and the related desire by investors to lock in some profits after the yearto-date (YTD) rally may be behind the slowing momentum. With very strong inflows into EM bond funds, YTD being long EM appears to have become a crowded consensus. In EM credit, this had led to what may be described as a rather indiscrimi­nate rally, with credit differenti­ation in EM corporates, for example, dropping to very low levels. Against this backdrop, it seems natural that investors are inclined to question the sustainabi­lity of the rally and lock in some profits. While events in Europe warrant some attention, we do not see a strong near-term catalyst that would turn the recent inflows into outflows. And in the absence of that, we think that for EM sovereign credit technical factors will likely further support the market. March and April are very high redemption months, which should support the absorption of the recent surge in supply. The narrative for EM FX and local rates is somewhat less compelling, however, as ongoing global growth concerns continue to cloud the picture.

(March 7)

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