Emerging market trading non-existent, fund inflows hit by investor fears

By Reshmi Basu and Paul A. Harris

New York, April 8 - Emerging market trading switched off Thursday as investors headed into to weekend with many unanswered questions.

"If there was any trading today, it was flat," said a trader. "It'll be quiet until we know if Brazil will cut rates next week or comes to market with a sovereign deal."

Many are betting that the Brazilian Central Bank will cut the benchmark Selic rate for the second time this year at its monthly policy meeting on April 13-14. The bank caught most investors off guard when it cut the rate to 16.25% last month.

Also, investors are psychologically pricing in expected rate hikes by the Federal Reserve, although new economic and political stories could dispel that sentiment.

"Everyone is holding off to see how the Fed rates play out," added the trader.

"We have insurgencies in Iraq. We could get news next week that the recovery has slowed down."

Inflows way down

Emerging market bond funds had inflows of a paltry $18.7 million for the week ending April 7 compared to inflows of $196.9 million for the week ending March 31, according to Brad Durham, managing director of EmergingPortfolio.com Fund Research, which tracks 251 dedicated emerging market bond funds.

"I think the positive jobless numbers and an adjustment of the consensus view for monetary tightening may have had an impact on flows," Durham told Prospect News.

Year-to-date inflows into emerging market bonds funds are about $1.4 billion, 8.7% of total assets.

"I think clearly investor sentiments will be contained a bit when it becomes clear that the Fed will start raising rates as soon as the third quarter of 2004," Durham said.

Previously investors had been expecting no increase until 2005 but views switched suddenly with the release of non-farm payrolls data on April 2.

"With EM bonds, it's a war between the interest rate hiking expectations versus really strong fundamentals throughout the asset class in each of the individual markets that comprise the index," he added.

Brazil down, Turkey up in weightings

Brazil, the largest country in emerging market debt weightings for the average EM bond fund, has been hit hard by investor reluctance in the face of increasing political noise.

Brazil comprises 17.4% of the fund universe and is down significantly from 18.3% in February and 18.9% in January.

Russia is second in line with a 15.3% weight in the average portfolio.

Durham said it has been a seesaw ride for the country as the country is off from its 17.7% high in the middle of 2003.

And in third, Mexico's tight spreads have pushed that nation up to 13.5% of the average emerging market fund from the previous month's 13.1%.

"I'm surprised at how tight most of the spreads are these days," said Durham.

And Turkey has been climbing, given its rising status with the International Monetary Fund.

The country makes up 5% of the average portfolio. It was a mere 2% last year.

"A successful and continuing relationship with the IMF is necessary given the country's fight to bring down inflation through fiscal and monetary reform," said Durham.

"And inflation is on the decline. Annual CPI inflation was 11.8% in March, which was the first time it has come in below the government's target of 12%," he noted.

Also declining interests rates and high GDP growth have bolstered the country's attractiveness to investors.

"It's comparable to Russia's GDP growth if not higher," says Durham.

"The monetary and fiscal policies are coming into order. All forces are pointing towards economic growth. As long as they keep the IMF in good stead then I think investor sentiments will be positive."

On April 24, Greek and Turkish Cypriots will vote on a referendum on a United Nation's reunification plan to end a 30-year long divide.

"Turkey has been fluctuating based on investor sentiment based on the negotiations of the reunification of Cyprus," added Durham.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.