Within emerging markets, Latin America appears to be facing its first recession since 1983. Weaker activity, higher unemployment, and rising fiscal deficits are likely to continue to exert upward pressure on external debt spreads. Citi analysts expect inflation to drift lower in most countries, and with weaker activity, central banks are likely to step up their easing efforts.

The economies of Central and Eastern Europe, Middle East and Africa (CEEMEA) continue to remain vulnerable to any rise in risk aversion. The chances of a V-shaped recovery (typically a sustained and pronounced recovery) are constrained by the contraction in external demand and a very weak international financial sector. Further exchange rate depreciation may be necessary for a more prolonged pick-up in economic growth.

Despite compelling valuations In Latin America, Citi analysts continue to be underweight in Mexico (US-driven, lesser policy flexibility and earnings risks). Instead, they are adopting a more defensive strategy, and are overweight in Colombia (relatively well diversified and attractively valued) and Chile.

In CEEMEA, the Russian market enjoyed strong performance in March - rising 22%, however these gains may retreat in the near term. Nonetheless, given already depressed sentiment and attractive valuations, Citi analysts are now upgrading Russia from neutral to overweight. By contrast, they are less positive on Israel.