Last month, capital flows towards emerging market assets were maintained, but at a lower pace. The action of the FED enhances the attractiveness of these markets, but experts warn caution by some signs to take into account, such as the real real yields of local bonds.
The portfolio flows to the emerging markets are still firm and flowing, but now it seems that by narrower channels after reaching US $ 44,800 million last August, compared to US $ 38,100 million in July, according to the monitoring of the IIF. However, the “Think Tank” of World Banking warns, the composition of these flows reveals a growing fragility. The interest in fixed income dominated the net tickets of international capitals that added US $ 41,5 billion, while tickets to the variable income drastically fell to only US $ 3,300 million. “This marks the weakest month for the capital flows of emerging markets from spring (boreal) and reflects a significant change in confidence towards markets excluding China”explains the entity.
Although global financial conditions were generally favorable, with a modest decrease in the yields of US treasure bonds and a volatility of the contained variable income, The distribution of the flows points to a decrease in investment appetite and a growing geographical concentration. In this sense, it is observed that The flows to the debt bonds were led once again by China, which received US $ 28.3 billion, slightly below the US $ 30.8 billion in July. While the rest of the emerging market complex registered US $ 13,200 million in net tickets for fixed income, a figure that remains well below the previous peak of the cycle.
At the regional level, the emerging markets of Asia attracted US $ 18.1 billion, Latin America US $ 8.9 billion, Europe US $ 8.7 billion and a half east and northern Africa US $ 5,800 million. “While all recorded higher tickets to those of the previous month, the underlying pattern still reflects China’s disproportionate role in the portfolio assignment.” For the IIF, tickets in debt bonds of emerging markets are still backed by nominal and real yields, as well as a context of generally favorable duration. They also highlight the participation in the ETF funds that remains a key driver of these flows, while the active mandates not related to ETF show signs of greater selectivity both in the sectoral exposure and in the duration.
Variable income, with more fragile panorama
On the side of the Variable Income the panorama was more fragile. IIF data show that total flows towards emerging market shares fell au $ S3.3 billion, compared to US $ 16,200 million in July. Within that figure, China received US $ 10,800 million, while emerging market variable income flows (excluding China) became slightly negative. In India alone, higher exits were registered with $ 1,400 million, and additional sales were observed in Indonesia, Malaysia and Thailand. In contrast, Latin America received US $ 3,200 million in variable rental flows and emerging markets of Europe added US $ 1,800 million, both practically unchanged since July.
“The collapse of variable rental flows, excluding China, concentrated on active vehicles, while passive variable income continued to attract tickets, although more moderately. Investor positioning seems increasingly sensitive to general risk and political noise, especially in economies exposed to external shocks or electoral cycles ”IIF economists explain.
Retail flow data confirms even more this divergence: local bond funds recorded net tickets, backed by mandates in strong and local currency, although flows to local emerging market bonds (excluding China) slowed considerably. On the contrary, funds centered on China were under pressure, especially in the local market. “Sovereign bond funds continue to dominate, while corporate strategies remain more moderate in terms of positioning and net assignments. Among the exhibitions in local currency, the assessment of the indexable debt has exceeded 90% of its nominal value in almost all emerging countries, except Brazil. This highlights to what extent the technical conditions have already exceeded the foundations, which increases vulnerability to new shocks or revaluation episodes, ”says the entity that warns that the volatility of real yields remains worrying, especially in emerging markets with weaker inflation anchors.
Looking ahead, the IIF maintains the opinion that the Fed will continue to relax its monetary policy, which should continue to promote flows to emerging ones, especially in local debt, where real yields remain attractive and exchange pressure has relieved. Anyway, they warn that the balance is fragile and the support mattress of the technical factors could be eroding. “While August’s flows remained positive, underlying tension signals are increasingwarns the entity.
Source: Ambito
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