Merrill trims bond exposure on four emerging markets

NEW YORK, June 11 (Reuters) - Merrill Lynch on Wednesday trimmed its weighting allocations for Turkey, Ecuador, Uruguay and El Salvador in its model bond portfolio recommended to investors, amid risk aversion and global economic pressures.

Merrill increased Turkey's "underweight" weighting as political risk is gradually increasing in the country and the local consensus is that new elections will have to be called.

Turkey was plunged into political turmoil in March when the Constitutional Court accepted a case to shut down the ruling AK Party for alleged Islamist activities.

After weeks of upbeat statements, the Islamist-rooted AK Party now believes its chances for survival are bleak and has begun planning how to return to power as a new movement.

This has driven local rates wider by 450 basis points since the beginning of the year. In this context, Turkish bonds should underperform, Merrill said.

The investment bank is reducing exposure in Turkey from 8.4 percent to 7.9 percent by selling $523,000 of Turkey bonds due in 2018 TRGLB18=RR at $96.00.

Merrill is maintaining its "overweight" allocation in Ecuador's bonds but is reducing its exposure from 4.2 percent to 3.7 percent, by selling $463,000 of Ecuador bonds due in 2015 ECUGLB15=RR at $105.30.

"While we continue to like the fundamentals in Ecuador, political noise increases as we approach the referendum on the constitutional reform," Merrill said.

A referendum on a new constitution that would strengthen Ecuador's President Rafael Correa's powers is expected to be held in the last three months of this year, although a draft of the constitution has not yet been finalized.

Political analysts believe widely popular leftist Correa's charisma, image as an outsider battling entrenched elites, and an expected boost in public spending will attract enough votes to win approval of the new constitution.

Merrill also cut Uruguay's bonds to "market weight" from "overweight" to take profits on its bonds, which have been the top performers in the second quarter of 2008, but also on concern about the fiscal impact of higher energy prices in the South American country.

The bank is reducing exposure to Uruguay from 3.5 percent to 3.0 percent, by selling $460,000 of Uruguay's bonds due in 2022 URUGLB22=RR at $110.10.

Merrill cut El Salvador to "underweight" from "market weight" as the Central American country is one of the credits with biggest exposure to the battered U.S. economy, mainly via remittances -- 18 percent of GDP -- and trade, and is also being affected by high oil prices.

In addition, "with a polarized political scene, tensions will likely increase on the road to 2009 elections," the bank said.

Merrill reduced exposure to El Salvador from 1.9 percent to 0.9 percent by selling $906,000 of El Salvador bonds due in 2023 SV015690909=RRPS at $111.25. (Reporting by Manuela Badawy; Editing by Jonathan Oatis)