EM fund flows: 22 weeks of gains for local bonds

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The flow of investors’ money into emerging market fixed income continues unabated, with figures showing a net inflow into EM local currency funds for the 22nd week in succession.

For an asset class that is still regarded as volatile by many investors, that’s a remarkably consistent record and a testament to the growing appeal of EM FI as a haven of stability in an unpredictable world. While Ben Bernanke has yet to speak at Jackson Hole, his words are unlikely to change this assessment.

According to figures published by EPFR, the research group, the net inflow into EM FI local currency funds was $512m in the week to Wednesday August 24, up from $273m in the previous seven days, and comfortably above the recent weekly average of $421m.

As RBS said in a report on Friday:

The resilience of flows into EM local currency shows that investors continue to reward the combination of healthy sovereign balance sheets and stronger relative growth prospects that EM countries offer.

We expect this asset class to remain in favour, which will provide support for EMFX and lower yields.

The local currency inflows contrast with continuing outflows from EM hard currency funds, as investors opted for the currency appreciation potential of EM FX, and from EM equities, which are being sold in the general flight to safety.

According to EPFR, hard currency EM bond funds lost $384m net, the third consecutive weekly outflow. EM equitiy funds lost a chunky $2.1bn, but at least it was less than the $2.8bn recorded the previous week, the $3.4bn average outflow of the last month.

Outflows from Russia funds were particularly large as investors judged that the country would be hit harder than other emerging economies by any deeper slow down in the developed world. In general, as Citigroup notes, country-specific funds fared worse than broader EM equity funds as investors sought to reduce risk.

The EPFR numbers confirm that a little confidence has returned to developed markets, a key consideration for EM investment. DM equity funds reversed three weeks of outflows
which averaged $10bn to see a $4.2bn inflow. DM bond funds saw an inflow of $740m, but the four-week total is still -$15.3bn.

But that confidence is fragile. Bernanke and his fellow central bankers at Jacksono Hole have their work cut out.

Related reading
EPFR file, beyondbrics

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