Morgan Stanley(US:MS)2025-07-09 02:40Investment Rating - The report maintains an unchanged view on emerging markets (EM) inflows, driven by lower yields and a weaker USD, which are expected to support EM inflows [1][10]. Core Insights - A 1% decrease in the USD is projected to result in approximately US$360 million inflows into EM local markets [10][29]. - A 1% outflow from foreign US Treasury holdings into EM local markets could equate to around 3% of local debt market size, 48% of daily FX turnover, and 0.8% of GDP across GBIEM countries [10][39]. - Current valuations in sovereign credit show little risk premium for tariff policy, with idiosyncratic drivers being the main source of dispersion [10][44]. Summary by Sections EM Flows and USD Sensitivity - The analysis indicates that EM local flows are significantly influenced by USD movements, with historical data supporting this relationship [21][32]. - The report highlights that the relationship between USD weakness and EM inflows has been consistently negative and statistically significant over the past decade [32][36]. Sovereign Credit Strategy - The report notes that EMBI index spreads are trading close to historical lows, with minimal risk premium priced in for potential tariff impacts [44][45]. - Specific countries like Zambia are on the verge of a credit rating upgrade, which could enhance their debt carrying capacity [70][50]. Regional Strategies - In Latin America, the Mexican Peso (MXN) has shown mild long positioning despite recent rallies, with its performance linked to US risk appetite [3][62]. - The report emphasizes the importance of macroeconomic fundamentals in shaping currency performance, particularly in the context of upcoming elections in Chile [83]. Trade Recommendations - The report includes specific trade recommendations, such as buying Zambia's 2053 bond with a target price of 77, reflecting a positive outlook on its credit rating upgrade [70][61]. - It also suggests maintaining positions in Turkey's sovereign credit, anticipating gradual rate cuts and resilience against economic shocks [71][75].