Preface xxv Acknowledgments xxxi Acknowledgments xxxiii Acknowledgments xxxv Acronyms xxxvii Introduction iii 1 EM FX 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 5 1.3 EM as Alpha Opportunity 10 1.4 Scope for even More Alpha 13 1.5 Summary 18 2 Global Macro Rules 19 2.1 What you need to get right: 65% global, 35% local . 20 2.2 When the US sneezes, the World (still) Catches a Cold 28 2.3 EM Central Banks Stimulate, as Fast as Markets Allow 32 2.4 When Bullish US Rates, EM Rates Outperform EM Credit . 34 2.5 When bullish EUR overweight CEEMEA over Asia 41 2.6 When Bullish Commodities Overweight Latam over Asia 45 2.7 Risk Aversion Barely Hurts EM Rates 52 2.8 Rising US High Yield Spreads Worse than Rising VIX . 57 2.9 Summary 59 3 China - the only Emerging Market that Counts 61 3.1 Global Business Cycle Made in China 61 3.2 The Commodity Link 64 3.3 On Leverage . 68 3.4 Current Account Surpluses No More 69 3.5 Enter the Capital Account 70 3.6 Reading the CNY Tea Leaves 75 3.7 CGBs -the JGBs for Millennials 83 3.8 The Grand Decoupling? 87 3.9 Summary 89 4 HowtoTradeEMFX 91 4.1 Only the JPY is special 91 4.2 No Helping Hand from EM Rates 94 4.3 Carry works - if you are Japanese 98 4.4 Current accounts: Measuring Risk the Old Fashioned Way . 106 4.5 Going for Growth . 112 4.6 Modest Value in Valuation 114 4.7 Terms of Trade 118 4.8 Technicals to the Rescue 120 viii 4.9 Flows Follow, don't Follow the Flows 125 4.10 Positioning with Positions 132 4.11 Going with the Seasons 136 4.12 Volatility - Foe, not Friend 138 4.13 Summary 140 5 How to Trade EMFX - Event Guide 143 5.1 Chaining the FX Vigilantes 143 5.2 Intervention at Work 145 5.3 Emergency Rate Hikes-only for Emergencies . 152 5.4 Capital Controls, IMF, or...China 157 5.5 IMF Packages Stabilize FX - Eventually 165 5.6 EM Elections-of Market Foes and White Knights . 166 Mexico turns Populist 171 5.7 Trading Data 173 5.8 Summary 177 6 How to Trade Emerging Market Rates-The Cycle 179 6.1 Emerging Markets: a Definition for Rates Traders 180 6.2 The Structural EM Trade is Dead; Long Live the Cycle 183 6.3 US Lessons for EM Rates-Turning Points 185 6.4 US lessons for EM rates-after the Turn 191 6.5 The Power of Patience: Receive around last Hike until Last Cut is Close . 194 6.6 More on Patience: Pay into First Hike until Last Hike Close . 196 ix 6.7 Steepeners: Receivers for Chicken 197 6.8 Flatteners: Payers for Chicken 200 6.9 How to Trade QE . 202 6.10 It is Tough to be an EM Central Banker 206 6.11 EMFX as an Unpleasant Constraint on EM Central Bankers . 207 6.12 Commodity Prices as an Unpleasant Constraint on EM Central Bankers 210 6.13 The Fed as an Unpleasant Constraint on EM Central Bankers 215 6.14 Inflation Forecasting in EM 217 6.15 Peaks in Inflation as Holy Grail 220 6.16 EM Rates-Trading the Cycle in the Front 222 6.17 EM Rates-the Impact of US Treasuries 228 6.18 EM-Curvy . 232 6.19 Does Valuation Work? 236 6.20 Term Premia-Use Sparingly 239 6.21 Sliding down the Slope 242 6.22 Fiscal-Falling Flat . 243 6.23 Summary 245 7 Real Rates - Simply Superior 247 7.1 Buy Linkers and Sleep Well 247 7.2 How to Sleep even Better 249 7.3 What is Fair ? 254 7.4 Or is it structural ? . 261 x 7.5 Summary 263 8 How to Trade EM Rates - Event Guide 265 8.1 Trading Data 265 8.2 Learn to Love Negative Carry 271 8.3 Being Inclusive Pays Off Nicely 273 8.4 Trading Disasters . 276 8.5 Summary 278 9 How to Trade EM Credit 281 9.1 The Structural Trade is Dead, Long Live the Cycle . 281 9.2 Carried Away by Momentum 287 9.3 Finding your Sweetspot 291 9.4 The Warren Buffet Trade in EM credit 292 9.5 Improving On Buffet 294 9.6 Credit Selection according to Ray Dalio 297 9.7 Pegs Make it Worse 303 9.8 IMF - What is it Good for ? 304 9.9 Embrace Defaults . 307 9.10 Of Credit Curves 313 9.11 Evaluating Value . 316 9.12 Rating Agencies-Late, but Market Moving . 320 9.13 External versus Local 325 9.14 Summary 327 xi 10 Portfolio Construction 331 10.1 Smarter With Benchmarks 331 10.2 Frontier Markets at the Frontier 335 10.3 Portfolio Allocation without Markowitz 337 10.4 Derivatives - Weapons of Mass Alpha 340 10.5 ESG and EM - not Fair ! 342 10.6 Summary 349 11 The (near) Future - Big Data, Machine Learning, and What if there are no Emerging Markets Left 351 11.1 Big Data is Coming....but more Slowly in Fixed Income 352 11.2 Machine Learning - Supervision Needed for Supervised Learning 358 11.3 No Disappearing Act for Emerging Markets 361 11.4 Summary 366 A Basic Concepts 367 Bibliography 371
DR. DIRK WILLER is a Managing Director and Global Head of Emerging Market FX and Fixed Income Strategy at Citi Research in NY. His research covers global emerging markets for FX, local rates, and credit. His expertise further extends to the analysis of developments in G3 markets and their impact on global emerging markets. Dirk and his team have been ranked as the top team in the 2019 institutional investor survey for emerging markets strategy in FX and rates for Latam, CEEMEA and Asia. In Latam Dirk has been ranked first for four years in a row. Dirk's credit team has also been ranked among the top teams for Latam in the last years. Dirk is frequently quoted in the financial press, including Bloomberg, Reuters, Financial Times and the WSJ, as well as interviewed on TV. Previously, Dirk worked at Omega Advisors and RHG Capital as a global macro strategist and at Swiss Bank as Russia strategist. Before his work on the buy and sell side Dirk advised the Russian government under Deputy Prime Minister Anatoly Chubais during the successful stabilization period in the early 90ies. Dirk started his studies at the University of St. Gallen, Switzerland, and holds a PhD and a MSc with distinction in Economics from the London School of Economics. Dirk is a member of Atlantik-Bruecke and the Economics Club of New York. He resides in NYC with his wife and four daughters. RAM BALA CHANDRAN is a Portfolio Manager on the Emerging Markets Debt team responsible for FX and rates management, covering Latin America. Prior to joining Neuberger Berman, Ram held a similar role at ING Investment Management. Before that he worked at Citigroup as an Latin American FX and local markets strategist. Ram holds a Bachelor's degree in Mechanical Engineering from the Indian Institute of Technology, Madras, India and earned a Master of Science in Computation for Design and Optimization from the Massachusetts Institute of Technology (MIT), Cambridge. KENNETH LAM is a Director in Latam Strategy at Citi Research, with a focus on foreign exchange and local market fixed income. Previously Kenneth worked in US rates and mortgage trading as well as FX Structuring at Citi. Kenneth holds a Bachelor's degree in Systems Design Engineering from University of Waterloo and a Master's degree in Computational Finance from Carnegie Mellon University.