Primas Insights – May 2023

Before we dive into the specifics of emerging markets, let us talk a bit about global macro and developed markets as we think those will be the dominant factors driving EM in the near term. Macro concerns from inflation vs. recession to China’s growth are well televised, and we will not add more doom and gloom here. We also talked about our China views in the April newsletter. Yet, despite all these macro anxieties, risk assets, in general, have been lackluster as the market was in an extended period of low volatility. VIX, for the most part, spent the majority of its time around 15 and at one point was at its lowest since 2020/

Now let’s get to the main point of our monthly update – what do we think of emerging markets? We prefer DM over EM credit from a global credit perspective. China data have disappointed with high-frequency data suggesting growth momentum remains sluggish in May. Housing continues to be a big drag on the growth recovery – home prices started to decline in April, which could extend into May-June, given the weaker labor market, gloomier home buyer sentiment, and more failed land auctions in lower-tier cities. China credit has therefore underperformed global EM credit recently (Figure 6), partly reversing the re-opening rally in late 2022 and early 2023. Away from China, idiosyncratic developments and dispersion also remain in focus. Selected areas saw volatility picked up in May from relatively low levels, with Turkey being a prime example (Figure 6). Political developments also remain in focus across Latin America.

Our strategy for the EM beta is to play the patience game as there are better areas to deploy risk within global DM credit. In the interim, we stick to short-dated carry which are still at some of the most attractive levels we have seen in the past decade. We intend to focus more on alpha trading opportunities from both the long and short side and we patiently await dislocation opportunities on the EM beta.

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