EM investors optimistic but lack conviction; volumes light; EM bond funds see outflows

By Christine Van Dusen

Atlanta, Oct. 14 - Continued optimism about the European debt crisis tightened spreads and kept risk appetite healthy for emerging markets assets on Friday. But volumes stayed light, and a lack of conviction remained the theme.

"Spreads are tighter by approximately 10 bps and overall Street volume and customer inquiry is light," a New York-based trader said. "Liquidity is difficult as everyone seems to be wishing they could get another shot at the liquidity they had access to during Wednesday's rally ... It looks as though everyone needs a breather to reflect on this week's price action."

The tone remained strong, another trader said, but the session was mostly lackluster.

"But spreads are still performing, and there's been a solid bounce-back in tone since last Tuesday's mayhem," he said. "I think the technical picture is a lot cleaner as many dealers got the tap on the shoulder over the past fortnight to hedge up and sell paper."

Flows were more balanced, with some liquidity continuing to return to off-the-run names, a London-based trader said.

"The market feels happy with where it is," he said.

In other news, emerging markets bond funds reported outflows of $305 million for the week ended Oct. 12, according to data tracker EPFR Global.

Sukuks stay strong

Sukuk issues remained in fashion on Friday, a trader said.

"Looking at month-on-month moves, once again the power of the sukuk shines through," he said. "Sukuks remain a rock and are all tighter on the month outside of Dubai names and [Dar Al-Arkan International Sukuk Co. II]."

Sharjah Islamic Bank saw its 2016 notes trading on Friday at 105 bid, 105.62 offered.

"Sharjah has had a great run the past few months but looks fully valued to me here," the trader said. "Qatar National Bank traded at 99.25 last week - always a buy on dips for that name. And there's good pick-up for those brave enough to venture into Burgan Bank, Bahrain Bank and African Export-Import Bank."

Sellers were seen for HSBC Bank Middle East and buyers for International Petroleum Investment Co.'s 2016s and Qtel International's 2016s. And two-way activity was seen for Lebanon, Dubai and Qatar names.

"But overall, there were below-average volumes," he said.

Russia bonds mixed

Meanwhile, KazMunaiGaz continued to outperform Gazprom.

"Russia's quasi-sovereign bonds are a mixed bag, with two-way interest," a trader said.

Said another trader, "Russian corporates are all trading a half-point softer on the open, with the usual metals and miners still showing the most volatility."

Looking at Ukraine, the curve opened a half-point weaker amid talk of devaluation.

And Turkey started the session quiet and mostly unchanged.

"We're seeing screen support for Yasar Holdings," a trader said. "Finansbank still amazes me, as it's much better than the sovereigns at the moment.

EM assets take 'round trip'

Several bonds have managed to tighten back to their early September levels over the last month, a trader said.

"It's the EM round trip club," he said.

Sberbank's 2021s' spread - at Libor plus 395 bps on Sept. 10 - was Libor plus 630 bps at its widest and on Friday narrowed to Libor plus 390 bps. Gazprom's 2015s, after coming in at Libor plus 325 bps on Sept. 10, were at Libor plus 525 bps at the widest and tightened to Libor plus 325 bps by Friday.

Turkey's 2021s were at Libor plus 275 bps on Sept. 10 and Libor plus 400 bps at their widest. On Friday the notes were at Libor plus 270 bps.

Africa ticks higher

South Africa's 2022s - at Libor plus 175 bps on Sept. 10 - were at Libor plus 275 bps at their widest and narrowed to Libor plus 175 bps on Friday.

"What a month it has been," the trader said.

In other trading from Africa, most names ticked higher as broader markets remained supportive, a trader said.

There were a "few buyers of Nigeria around and retail investors on GTB Finance's 2016s," he said. "Morocco's 2017s remain one not to mess with, and front-end Tunisia feels a little heavy."

LatAm moves higher

Looking to Latin America, most names moved higher after a brief downtick on Thursday, the New York-based trader said.

"It seems yesterday people deemed that the markets had climbed too much too fast, although most assets were able to hold their gains yesterday and some have moved higher today in response to continued positive developments with the E.U. banking situation," he said.

Positive retail sales data from the United States contributed to the more positive tone.

Danga oversubscribed

The final book was 3.6-times oversubscribed for the new issue of RMB 500 million 2.9% notes due 2914 from Malaysia's Danga Capital Bhd.

The notes came to the market at par via BOCI, CIMB and RBS in a Regulation S-only transaction, reportedly the world's first renminbi-denominated issue of sukuk notes.

The notes were guaranteed by Khazanah Nasional Bhd., the investment holding arm of Malaysia, based in Kuala Lumpur.

Outflows for EM funds

Though emerging markets bond funds reported outflows of $305 million for the week ended Oct. 12, funds with both a local- and hard-currency mandate managed to take in some money, said Cameron Brandt, senior analyst with EPFR.

"So the tide may be turning again," he said.

This was the fourth straight week of outflows for EM bond funds, the longest such streak since a 10-week run ended in mid-March of 2009, according to EPFR.

Caution urged

While investors appear hopeful that a solution will be forged for Europe's debt and banking problems - and EM credit has bounced back in response - it's important to remain cautious, according to a report from Barclays Capital.

"It is necessary to focus on trades with strong idiosyncratic stories and, at the very least, neutral offshore positioning technicals," Barclays said.

The bank is suggesting that investors increase exposure to Poland.

"With the political status quo assured post-election, we are confident that the Polish government can build on its solid fiscal performance this year," the report said. "Also, even in a more challenging growth environment, we believe Poland will deliver the envisaged fiscal adjustments to secure the current ratings and to maintain stable debt dynamics."

Lithuania could be another good bet, Barclays said.

"We would expect Lithuania cash to catch up with the bigger benchmark names which have led the bounce, if the more benign risk environment persists," the report said.

Venezuela supply a risk

At the same time, Barclays is recommending that investors reduce their position in Venezuela ahead of expected supply risks as a result of next year's election. A tactical increase in Argentina is suggested.

"The Venezuelan government announced two days ago that it is planning a large increase in public expenditures in the 12 months ahead of the presidential election, and, to finance this, seems willing to increase issue accordingly," Barclays said. "In the year to date, the government has already exceeded our expectation for the international market, issuing $15.2 billion versus our forecast of $12 billion. Moreover, for the next 12 months, we are forecasting $12 billion of additional issuance from the Republic and PDVSA."

Investors should look at Argentina. "The credit's technical position, recent underperformance, and high beta nature may grant a tactical long," the report said.

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