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.

List of Figures xi

List of Tables xvi

Introduction xvii

Acknowledgements xxi

Acronyms xxiii

Chapter 1 EMFX 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 4

1.3 EM as an Alpha Opportunity 7

1.4 Scope for Even More Alpha 9

1.5 Summary 12

Chapter 2 Global Macro Rules 13

2.1 What You Need to Get Right: 65% Global, 35% Local 13

2.2 When the US Sneezes, the World (Still) Catches a Cold 18

2.3 EM Central Banks Stimulate as Fast as Markets Allow 20

2.4 When Bullish on US Rates, EM Rates Outperform EM Credit 22

2.5 When Bullish on EUR, Overweight CEEMEA Over Asia 26

2.6 When Bullish on Commodities, Overweight Latam Over Asia 30

2.7 Risk Aversion Barely Hurts EM Rates 34

2.8 Rising US HY Spreads Worse than Rising VIX 37

2.9 Summary 38

Chapter 3 China: The Only Emerging Market that Counts 40

3.1 Global Business Cycle Made in China 40

3.2 The Commodity Link 42

3.3 On Leverage 44

3.4 Current Account Surpluses No More 45

3.5 Enter the Capital Account 46

3.6 Reading the CNY Tea Leaves 48

3.7 CGBs: The JGBs for Millennials 54

3.8 The Grand Decoupling? 56

3.9 Summary 57

Chapter 4 How to Trade EMFX 58

4.1 Only the JPY is Special 58

4.2 No Helping Hand from EM Rates 60

4.3 Carry Works - if You are Japanese 62

4.4 Current Accounts: Measuring Risk the Old-fashioned Way 68

4.5 Going for Growth 72

4.6 Modest Value in Valuation 74

4.7 Terms of Trade 76

4.8 Technicals to the Rescue 77

4.9 Flows Follow; Don't Follow the Flows 81

4.10 Positioning with Positions 85

4.11 Going with the Seasons 86

4.12 Volatility: Foe, Not Friend 87

4.13 Summary 88

Chapter 5 How to Trade EMFX: Event Guide 90

5.1 Chaining the FX Vigilantes 90

5.2 Intervention at Work 91

5.3 Emergency Rate Hikes - Only for Emergencies 95

5.4 Capital Controls, IMF, or . . . China 98

5.5 IMF Packages Stabilize FX - Eventually 103

5.6 EM Elections: Of Market Foes and White Knights 104

5.7 Trading Data 108

5.8 Summary 111

Chapter 6 How to Trade Emerging Market Rates: The Cycle 112

6.1 Emerging Markets: A Definition for Rates Traders 112

6.2 The Structural EM Trade is Dead; Long Live the Cycle 114

6.3 US Lessons for EM Rates: Turning Points 116

6.4 US lessons for EM Rates: After the Turn 120

6.5 The Power of Patience: Receive Around the Last Hike Until the Last Cut is Close 121

6.6 More on Patience: Pay into the First Hike Until the Last Hike is Close 122

6.7 Steepeners: Receivers for Chickens 123

6.8 Flatteners: Payers for Chickens 125

6.9 How to Trade QE 127

6.10 It is Tough to be an EM Central Banker 129

6.11 EMFX as an Unpleasant Constraint on EM Central Bankers 130

6.12 Commodity Prices as an Unpleasant Constraint on EM Central Bankers 132

6.13 The Fed as an Unpleasant Constraint on EM Central Bankers 136

6.14 Inflation Forecasting in EM 136

6.15 Peaks in Inflation as the Holy Grail 139

6.16 EM Rates: Trading the Cycle in the Front 140

6.17 EM Rates: The Impact of US Treasuries 145

6.18 EM - Steeped in Risk 147

6.19 Does Valuation Work? 150

6.20 Term Premia: Use Sparingly 152

6.21 Sliding Down the Slope 154

6.22 Fiscal: Falling Flat 155

6.23 Summary 156

Chapter 7 Real Rates: Simply Superior 157

7.1 Buy Linkers and Sleep Well 157

7.2 How to Sleep Even Better 159

7.3 What is Fair? 162

7.4 Or is it Structural? 166

7.5 Summary 167

Chapter 8 How to Trade EM Rates: Event Guide 168

8.1 Trading Data 168

8.2 Learn to Love Negative Carry 172

8.3 Being Inclusive Pays Off Nicely 173

8.4 Trading Domestic Disasters 175

8.5 Summary 176

Chapter 9 How to Trade EM Credit 178

9.1 The Structural Trade is Dead: Long Live the Cycle 178

9.2 Carried Away by Momentum 182

9.3 Finding Your Sweet Spot 185

9.4 The Warren Buffett Trade in EM Credit 186

9.5 Improving on Buffett 187

9.6 Credit Selection According to Ray Dalio 189

9.7 Pegs Make it Worse 193

9.8 IMF: What is it Good For? 194

9.9 Embrace Defaults 196

9.10 Of Credit Curves 199

9.11 Evaluating Value 200

9.12 Rating Agencies: Late, but Market Moving 203

9.13 External versus Local 206

9.14 Summary 208

Chapter 10 Portfolio Construction 210

10.1 Smarter with Benchmarks 210

10.2 Frontier Markets at the Frontier 213

10.3 Portfolio Allocation without Markowitz 214

10.4 Derivatives: Weapons of Mass Alpha 216

10.5 ESG and EM: Not Fair! 217

10.6 Summary 222

Chapter 11 The (Near) Future: Big Data, Machine Learning, and What if There are No Emerging Markets Left 223

11.1 Big Data is Coming to Fixed Income 223

11.2 Machine Learning: Supervision is Needed for Supervised Learning 227

11.3 No Disappearing Act for Emerging Markets 228

11.4 Summary 231

Appendix A

Basic Concepts 233

Bibliography 235