EM Special Publication_ EM local markets vs. externals_ how much is priced in_ - October update

Summary of Deutsche Bank's Emerging Markets Special Publication Industry Overview - The report focuses on Emerging Markets Fixed Income (EMFI) performance and its relationship with external variables, particularly in the context of the upcoming US elections [2][3]. Key Insights 1. Explanatory Power of External Factors: - The explanatory power of external factors in EMFI returns has significantly increased, now explaining 93% of return variation over the past six months, compared to a long-term average of 76% [3][4]. - The importance of external factors varies by region, with Asia showing a high R² of 95% and LatAm at a historically low 60% [4][10]. 2. Regional Differentiation: - There is notable differentiation across regions, with CEEMEA maintaining a high R² above 90% and LatAm lagging behind despite a recent increase [4][6]. - The sensitivity to US rates has declined, particularly in Asia and LatAm, while the influence of US equities and growth prospects has risen [4][10]. 3. Homogeneity in EMFI: - A PCA analysis indicates increased homogeneity in EM local rates, with 82% of the cross-country variation in 10Y fixed income explained by a single factor [5][6]. 4. Valuation and Returns: - Current EMFI valuation indicates that the average 10Y EM bond yield is slightly cheap at 6.38% compared to a fair value of 6.31% [20]. - Estimated returns for EMFI are projected at approximately 3.7% by year-end, contingent on US Treasury yields [20]. 5. Country-Specific Insights: - Countries like TRY, ZAR, and MXN are identified as particularly cheap, while PEN, CLP, and THB are considered rich [20][22]. - The importance of external drivers has increased for currencies like PEN and IDR, while it has decreased for RON and BRL [12]. 6. Investment Opportunities: - No cross reached the combined z-score threshold for the most attractive trades, but long positions in TRY against short positions in THB, CLP, or PEN show potential [22]. Additional Important Points - The report emphasizes the ongoing influence of global risks, particularly the US elections, on EMFI performance [5][6]. - The analysis suggests that while local factors still matter, their impact has diminished in recent months [9][10]. - The report includes detailed figures and tables illustrating the changes in R² values and normalized residuals across various currencies and regions [11][12][20]. This comprehensive analysis provides valuable insights into the current state of EMFI, highlighting both risks and opportunities for investors in the emerging markets landscape.