Emerging Markets Outlook and Strategy: Rising tensions but not a turning point: Stay OW FX, MW rates and credit

EM assets have experienced a considerable degree of pressure since September, although they have mostly outperformed DM. In local markets, EM FX is down about 2% since the start of September, though in total return terms EM FX is still up over 3% on the year. GBI-EM yields are up about 20bp since the start of September, but the vast majority of GBI-EM markets have outperformed US Treasuries. In credit, EMBIGD and CEMBI BD widened around 18bp and 17bp respectively since September 3, but we see it more as a wobble than a regime shift, with spreads remaining near historical tights. Our base case is resilient, synchronized global growth with inflation likely to firm, but the outlook was priced to perfection and macroeconomic uncertainty has started to rise. We remain OW EM FX and MW local rates, narrowing our focus on the highest carry candidates (TRY, COP and newly BRL) and idiosyncratic stories, while reducing exposure to the lowest carry currencies (CZK, ILS, PLN). In credit, we remain