| LONDON, Sept 5
LONDON, Sept 5 International investors who have
long complained of limited choice in emerging market assets are
now finding that local currency debt markets from Nigeria to
China are becoming more accessible.
The local debt of South Africa and Nigeria is expected next
month to enter indices tracked by global and emerging market
debt investors, making it available to a wider pool of buyers,
while Russia and China are opening up their local debt markets
to foreign investors.
Foreign holdings of local government bonds have nearly
tripled in Mexico and nearly doubled in South Africa since 2007,
according to JP Morgan, and these index and regulatory changes
are likely to increase foreign holdings further.
Core debt markets in the euro zone, United States and Japan
are offering tiny or even negative yields, helping emerging
market bond funds to post net inflows of $30 billion this year,
according to Boston-based fund tracker EPFR.
South Africa will join Citi's World Government Bond Index,
benchmarked by $2 trillion in international funds, in October,
when Nigeria is expected to join JP Morgan's local emerging
GBI-EM series, benchmarked by around $170 billion of assets.
"There is clear demand to own these assets, for
diversification and for the potential to pick up higher yields,"
said Luis Costa, emerging markets strategist at Citi.
"Nigerian T-bills trade at 14 percent, that's a fantastic
pick-up in rates over the core."
Citi estimates up to $7.5 billion will flow to South
Africa's bond market over the next couple of years due to its
inclusion in the WGBI index, whose 23 existing countries include
emerging markets Mexico, Malaysia and Poland.
Increased demand for a bond market lowers bond yields,
reducing borrowing costs for the issuer.
South African three-year debt yields have fallen
more than 100 bps since the WGBI announcement in April, though
the central bank's sharp rate cut in July also helped. Nigerian
three-year bond yields have fallen to three-month lows
since the JP Morgan announcement last month.
While South Africa and Nigeria's membership of the bond
market pack reflect improved credit ratings or liquidity,
countries with more capital controls are also aware of the need
to attract international investors.
Russia is expanding foreign participation in its $90 billion
OFZ market by allowing it to be cleared via the international
Euroclear and Clearstream systems. This means investors no
longer need a local account in Russia to buy local debt.
Foreign ownership of Russian local debt is estimated at only
around 5 percent of the market, compared with 30 percent in
Poland and Mexico and 50 percent in Hungary.
Even in China, which has been reluctant to open up its
onshore markets too fast, international investors can now buy
domestic bonds through the country's Qualified Foreign
Institutional Investor (QFII) system of licenses and quotas,
which Beijing loosened further in July.
Central banks and sovereign wealth funds are enthusiastic
buyers of Chinese bonds.
Investors say that in global GDP terms, emerging markets
merit a larger weighting in portfolios, but there is still a
lack of suitable assets. In index terms, weightings are just
0.41 percent for South Africa in the WGBI and 0.59 percent in
the GBI-EM Global Diversified index for Nigeria.
And some investors are constrained from investing until
markets enter a benchmark index, a lengthy process that can
allow specialist investors to get ahead of the game.
The wild performance of currencies this year could also
deter investors, who have so far preferred emerging debt
denominated in dollars or euros, according to EPFR data.
The South African rand has fallen more than 4 percent
in 2012 and even China's yuan, for years viewed as
certain to appreciate, has weakened.
Emerging local currency debt has posted returns of more than
9 percent this year, but it is outstripped by hard currency
returns of 13 percent.
"When we have a turbulent period, the local debt sells off
more ... the volatility of local debt has disturbed more
clients," said Sam Finkelstein, emerging market debt portfolio
manager at Goldman Sachs Asset Management.