(Repeats story that ran on Friday, with no changes)
By Natsuko Waki
LONDON May 2 Investors dipping their toes back
into emerging markets are choosing hard currency debt which,
thanks to rich yields and expectations for a stronger dollar, is
the developing world's best performing asset class this year.
The Institute of International Finance, which provides the
most authoritative capital flows data, says emerging markets
drew $25 billion from global stock and bond investors in April,
after combined $55 billion inflows in February and March.
Bonds attracted almost two-thirds of April flows, IIF said.
Separately, Boston-based EPFR Global, which tracks mutual
funds, says emerging bond funds had net inflows of about $500
million in the week to April 30, enjoying the fifth straight
weeks of inflows.
But not all emerging debt fared well - dollar-denominated
hard currency bonds attracted almost $300 million, but those in
local emerging currencies such as the South African rand and the
Turkish lira saw outflows again, reflecting investors' concern
about currency weakness.
"People are not willing to take a high-beta fixed income
view in terms of exposure to (local) FX where most of the
volatility is. So there's more of a focus on dollar carry," said
Fredrik Nerbrand, global head of asset allocation at HSBC.
"It doesn't mean we want to necessarily buy all EM credit -
I suggest higher grade than lower grade. But valuation buffers
in EM are sufficient in relative terms to offset high headline
Hard currency debt is the top performing emerging market
asset this year, rising more than 5 percent to beat both
emerging and developed equities as
well as most high-grade and junk bonds in developed markets.
Dollar-denominated bonds give investors a uniquely high
interest rate without the risk of local currency volatility. And
appreciation in the dollar adds to returns.
Local currency debt has only gained 2.8 percent this year in
dollar terms. (link.reuters.com/pat75v)
Banks estimate there is a historically high 100-125 basis
points pick-up in yield for those buying emerging sovereign
debt, compared with Western corporates with comparable ratings.
"You get paid over 1 percent for owning equivalently rated
sovereigns in EM compared with U.S. corporates. Investors are
becoming more enthused about emerging markets," said Richard
House, head of emerging market fixed income at Standard Life.
Correlations between emerging market credit spreads and U.S.
Treasury yields have turned negative, having been
positive between February and early April. (link.reuters.com/qyk98v)
This suggests investors are relatively more comfortable with
the effects of the U.S. Federal Reserve's stimulus withdrawal, a
factor that triggered a hefty sell-off earlier this year.
"The spread pickup available for switching from U.S. or
Western European credit into emerging market credit remains at a
historic high," Barclays Capital said in a note to clients.
"We believe nascent stability and better developments in the
second half should encourage crossover investors to accelerate
the buying in EM that is already underway."
Emerging market sovereigns and corporates have already
successfully issued about $160 billion in new bonds this year,
reflecting a strong appetite from yield-hungry investors.
And they are ahead of schedule - corporate issuance is
almost half and sovereign bond sales are already halfway to
full-year forecast volumes, JP Morgan says.
"EM external debt issuance tells more about inflows to
emerging markets than mutual fund flows, as the latter covers a
small fraction of total assets," Bank of America Merrill Lynch
said in a note to clients.
"We see significant demand in our new issues from crossover
investors who are buying these assets for a core holding, not
for the purposes of selling them when they rally after they are
Emerging market debt could get further inflows soon. Japan's
public pension fund, the world's biggest with assets of $1.26
trillion, is seeking managers to buy emerging bonds as it tries
to diversify from low-yielding domestic debt.
(Additional reporting by Carolyn Cohn and Sujata Rao; Editing
by Susan Fenton)