EM assets 'resolute' amid global economic turmoil; money flows into EM bond funds

By Christine Van Dusen

Atlanta, June 22 - Emerging markets assets kept their positive momentum on Friday, even amid limited activity, as the broader market undulated on poor economic reports from the United States and China and news of looser funding constraints for banks in Europe.

"I came in this morning, thinking we'd be under a bit of pressure, but once again it's a very resolute market, although one with very low trading and activity," a London-based trader said.

While the external environment is certainly affecting emerging markets, the asset class continues to outperform its peers, said Nick Chamie, head of emerging markets research for RBC Capital Markets.

"I think investors are viewing EM as a safe haven, though not immune to what is taking place in Europe," he said. "But it's one of the better places to hide out."

Investors should consider putting their money to work in names like the Republic of the Philippines, Turkey and in the Gulf region, according to a report from Barclays Capital Markets.

Liquid Latin American, low-beta credits like Brazil, Mexico and Colombia are also good bets.

"We recommend staying close to benchmark in high-beta credits" like Argentina, Venezuela, Ukraine and "where correlation to global risk drivers is high," like Hungary, Russia and Indonesia, the report said.

Indeed, these kinds of names have proven popular during this time of volatility.

"These credits are the ones that people are focusing in on for outperformance," a market source said. "They give investors the opportunity to find some shelter in these volatile times. And until a more bullish mood overtakes the markets, they'll continue to be the favorites."

Meanwhile, the primary market was mostly quiet on Friday.

"I think people will be trying to get as many deals out the door as possible before the full summer sets in," Chamie said. "That, along with the fact that markets have been more or less shut for the past couple of months, means there's a big pipeline of deals waiting to get done. Investors have cash. But there really isn't the market stability to come in and issue. I think given the slightest opening of the window we'll continue to see some moderately sized deals being placed."

IPIC still 'stunning'

In trading on Friday, Abu Dhabi National Energy Co.'s 2017 bonds saw some selling, as investors switched into International Petroleum Investment Co.'s 2020 bonds. IPIC's 2041s were also in demand.

"I have to give it to IPIC's 2041s, closing at 116 bid, 117 offered," a trader said. "That's a stunning effort, almost 60 bps tighter on the month now."

The long-end of IPIC's curve was trading with a 116 handle.

"The belly is being a little bit left behind, and we saw some interest today on the 2020s and 2022s," he said.

Qatar sees demand

Other bonds from the Middle East had a decent session on Friday.

"It looks OK here," a trader said. "Qatar is just a rock. Super support and demand across all names. Good two-way interest on Qatar's RasGas Co. Ltd. 2016s this week. The bond has been lagging and we're finally seeing some take-out. I think it can perform a little."

He also traded a little bit of Dar al-Arkan's 2015 notes, which closed Friday at 104 bid, 105 offered.

"There are still pockets of value out there," he said. "It's another very solid week."

Bonds from Dubai were firm, he said.

"But again, there were limited actual trades and volumes," he said.

Jafza bonds tighten

Dubai-based Jebel Ali Free Zone's (Jafza) 2019 bonds closed the week 40 basis points tighter - trading Friday at 103.50 bid, 104.25 offered - while Dubai Water and Electricity Authority's 2020 bonds were 35 bps tighter.

In other trading on Friday, Morocco's 2020s were trading at 94.60, a London-based trader said.

"Maybe someone is moving into its northern neighbor, Spain, to pick up 120 bps," he said.

Saudi Electricity Co.'s 2017 notes - which traded Thursday at 100.70 bid, 101.20 offered - were seen Friday at 100.50 bid, 101.25 offered. The company's 2022 bonds were quoted at 103.62 bid, 104.37 offered after trading Thursday at 103.60 bid, 104.20 offered.

Sberbank trades down

Lebanon's 5% 2017 notes were seen Friday at 99.12 bid, 99.87 offered after trading Thursday at 99.25 bid, par offered.

Traders were also watching the recent issue of $1 billion notes due 2019 from Russia-based lender Sberbank.

The notes priced at par to yield 5.18% via Bank of America Merrill Lynch, JPMorgan, Mitsubishi UFJ and Troika in a Regulation S transaction.

Early on Friday, the new notes were trading at 99.65 bid, 99.75 offered. Later in the day the notes were quoted at 99.56 bid, 99.75 offered.

Fund inflows rise

Emerging markets bond funds saw inflows of $552 million for the week ended June 20, according to a report from data tracker EPFR Global. That is up from the previous week, when the funds took in $361 million.

"Flows into funds with local currency mandates hit a 12-week high," said Cameron Brandt, director of research with EPFR. "Rotation out of European fixed income, especially by institutional investors, remains the big driver."

Also driving that rotation is the prospect of further quantitative easing in the United States, Brandt said.

"Going into the final week of second-quarter 2012 there was no shortage of things for investors to worry about, among them slowing growth in China and Germany, Spain's banking woes, corporate profit warnings and signs of weakness in the US economy," EPFR said in its report.

"But flows in and out of EPFR Global-tracked funds suggested that a significant number of those investors see today's bad news as tomorrow's new round of quantitative easing."

Funds dedicated to emerging Europe, the Middle East, Africa, Asia and Latin America saw fresh money during the week, the report said.

© 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.