EFTA01379447.pdf

11 December 2017 Special Report: EMFX Outlook 2018: Growth'led Revaluation kRV: The currency goes into next year with tailwinds Growth-valuations mix is attractive for MYR, PLN, HUF from strong data and expectations of further policy and CLP tightening. The current account should benefit from improvement in shipbuilding orders, and the impact of 15 relations normalizing with China on the services deficit 10 'Mg - and while the overall surplus might decline, the • ory• RS adjustment would likely be gradual. Equity valuations 1CRW SRL ch are still supportive and trade policy related pressures 0 r ._..._....._..._......-.. .-- • continue to keep the authorities from intervening in any -5 PRP • sup 1WD . RUB *His significant manner in the revaluation of the currency. • • iDA • E Geopolitics remains a key risk, but the market appears *KM • , , . ZAR fatigued with the headlines, and are likely to be averse 115 Co. SLOW CLP • • MA to trading the noise. better geowth/ valuation .20 1RY • 2) Idiosyncratic revaluation trades -25 .1 1 .2 0 2 2018 ,oral GDP wow*. venue 20124016 avenge, pp We are bullish MYR. PLN. HUE CLP. and PEI' both on valuation and domestic developments. Sane Deteich• an yr, ,; The main appeal is its cheapness on fundamental PLN d 1' 1.)". Both PLN and HUF are within a handful valuation metrics (earlier chart). Foreign positioning in of currencies that are undervalued on all three of our bonds is light from a historical perspective (chart fundamental valuation approaches (PPP, DBeer, FEER) below), and inflows are returning. Therefore, it is a rare on steady depreciation over the past 5 years despite case where both 'stock' factors (valuation, positioning) improving fundamentals. Consequently, on a REER and 'flow' factors (portfolio inflows) are supportive. basis, PLN and HUF have depreciated significantly vs. Further, the absence of an active NDF market has Asian manufacturing currencies among others enabling tamed both speculation and USD betas. them to gain market share in global trade. This has led to vast improvements in current account balances - MYR: Light positioning despite return of bond inflows from deep deficits in 2008, current accounts are in surplus for Hungary and close to flat for Poland. 55% Meanwhile, growth is strong (well above trend) and broad-based (the growth-valuations mix is attractive), and labor markets are tight. HUE & PUT Rare case of undervaluation in 3 metrics 45% 15 H1W. PLN avenge mooleanrniont (%). TVA-based .....FEER —PPP —Share of foreign holdings of local 10 currencydebt 35% M n1 en VV./ in in in • V) 2 8A, 2 8ft l• 8 Alt 8 .5 Sane Derache bric Mane Mitopcs .10 On the fundamental front, growth has surprised to the 15 Octal OPt•13 Oct.15 <kW? upside (therefore providing an attractive growth- valuations mix), the central bank has turned more San. Deascho Bra hawkish (BNM could well be the next central bank in the region to hike rates), and higher oil prices should Technically, at the top of the range of the also provide a boost to Mr% (Malaysia is the only net past 15 months is an attractive entry level. Further, we oil exporter in Asia). There is a clear need to accumulate reserves, but authorities appear believe the NBH is comfortable with a stronger HUF on comfortable with a stronger MYR, perhaps given the rising inflation and current account in surplus. Once the boost that entails to confidence ahead of an election. elections are completed in Q2 2018 there is a possibility that the NBH becomes even taxer with respect to the currency, opening up more room for Page 6 Deutsche Bank Securities Inc. CONFIDENTIAL - PURSUANT TO FED. R. GRIM. P. 6(e) DB-SDNY-0076925 CONFIDENTIAL SDNY_GM_00223109 EFTA01379447