Emerging Markets: Outlook for External Debt in 2006

EM external debt has posted notable gains in recent years as solid
fundamentals, improving creditworthiness and strong technicals provided
the necessary impetus for exceptional spread compression. That said, given
the magnitude of this adjustment we must assess whether current premiums
across EM debt sufficiently offset the underlying risk of holding such
assets. While supportive technical factors are unlikely to deter
sentiment over the short term, it remains our view that the likely
resurgence of political risk remains the main threat for EM debt during
2006. In consideration of such factors we suggest a more selective
approach to EM debt next year and highlight trade recommendations that
offer relative value across a spectrum of such diverse credit quality.

KEY RECOMMENDATIONS:
Russia to outperform its investment grade peers...
Ukrainian valuations overprice political risk...
Brazil\'s recent outperformance offers relative value opportunities...
Russia to trade through Mexico\'s sovereign curve...