Bank of America names its top emerging picks for 2016

The year 2016 isn’t very old but it already looks as though prediction is a game for the very brave. Chinese shares have already chalked up two days of plunge and shutdown; there’s new froideur between Saudi Arabia and Iran; and it seems very possible that North Korea has a thermonuclear weapon we didn’t know about.

Still, the foretelling goes on, with Bank of America Merrill Lynch latest into the fray with its top emerging market calls for this year.

“Our top trades for 2016 look to take advantage of monetary policy divergence within developed markets, between DM and EM, and within EM,” the bank’s analysts write.

“We are cautious on the return outlook given risks of a faster Federal Reserve (monetary) tightening, a sharper Chinese slowdown, volatile oil prices and US high-yield unraveling,” they go on.

Its not likely to be a blockbuster year though, with forecast returns of 1% for local EM debt, -0.4% for over all EM foreign exchange and 2.7% for EM’s external sovereign debt.

So, here’s the list:

BoAML’s top foreign exchange pick is to be long both Mexico’s peso and Poland’s zloty against the euro, while being short a basket of Korean won, Malaysian ringgit against the dollar, and South Africa’s rand against the rouble – all on the basis of monetary policy divergence.

The bank’s favourite local-debt long positions are in Russia, India and Brazil.

It prefers Russian paper to Turkish, fretting that, “the latest news on macro policy and constitutional changes” raises the risk that Turkey will be stripped of its investment-grade credit ratings.

Those who like Argentina’s chances under its new, more conciliatory and market-friendly administration might like to consider its EUR GDP warrants, perhaps hedged in currency terms in order to minimise exposure policy transition there. BoAML has raised Argentina to overweight thanks to the change in government.

However, events in China are clouding the outlook. Its the largest EM, after all, and its start to the year has been an epic, just not one that’s been fun to watch.

“We remain cautious amid renewed Chinese slowdown concerns and the global equity market rout,” the bank’s analysts conclude.

This article first appeared here: https://news.markets/bonds/bank-america-names-top-emerging-picks-2016-7901/