A new indicator of cross-border capital flows unveiled Thursday may give emerging markets a ray of hope in what has been a pretty dark week.
The Institute of International Finance’s new “Portfolio Flows Leading Indicator” shows a sunnier picture of the last three months than the barometer investors typically rely on to gauge cash flows to emerging market, EPFR Global’s cross-border investment index.
IIF economists say markets may be more pessimistic than warranted since the capital-flow data helps investors determine the health of emerging economies.
“This is reason for a certain level of optimism,” said Felix Huefner, a deputy director at the IIF. The group represents over 450 of the world’s largest banks, hedge funds, insurance companies and other financial institutions.
The IIF says its indicator captures a more accurate picture of foreign investment into emerging economies’ bond and equity markets because it relies on two data sets: both EPFR Global input and information published by a dozen emerging markets.
When extrapolated to the top 30 emerging economies, the IIF says it gives a fuller picture of portfolio adjustments because it includes more info on institutional investors such as pension funds and sovereign wealth funds.
The EPFR Global data relies too much on retail investors such as hedge funds, the IIF said. And that matters because retail investors and institutional investors have different investment mandates.
Institutional investors “appear to have maintained their exposure to emerging markets, responding to strategic mandates to gradually raise their underweight allocations,” the IIF said. They are likely behind sustained strong demand for new bond issues, the group said. A spokesman for EPFR Global didn’t immediately comment.
The IIF tracker in this chart, for example, shows a net inflow of foreign investors into emerging economies’ bond markets, rather than the net outflow of capital indicated by the EPFR Global data.
Applying the new model to last-year’s sell-off, for example, dramatically changes the complexion on last-years market volatility.
Instead of a net outflow of capital out of emerging market equity and debt of $73 billion between May and October shown by the EPFR Global data, the IFF’s data shows a net inflow of $81 billion. The IIF says there are clearly some emerging markets legitimately coming under pressure by investors to fix their economies.
But more broadly, many are robust enough to weather the current storm and the group expects total capital flows to gradually pick up over the next two years as global growth strengthens.
The IIF’s picture of flows in 2013 more closely matches the one painted by long-term institutional holders. Many say the re-pricing and correction in emerging-market bonds and equities is an attractive buying opportunity.
These investors believe that emerging-market countries will continue to grow at a faster clip than the U.S., Japan, Canada and developed Europe, especially since many of these countries have already have embarked on reforms and policy fixes that will address their vulnerabilities.
J.P. Morgan Asset Management, for instance, has been adding to its sovereign debt positions, especially Mexico’s dollar debt.
Paul DeNoon, director of AllianceBernstein’s $28 billion emerging-market debt portfolio, said high yields on sovereign debt issued by countries like Brazil, Turkey and Indonesia are attractive.
“A lot of weaker BBB sovereigns are trading like BB or junk-rated credit,” Mr. DeNoon said For example, Brazil’s two-year local currency bond offers a yield of 12.79%, almost the same yield as a Nigeria’s similar-duration bond, according to Markit data.
wsj.com
The Institute of International Finance’s new “Portfolio Flows Leading Indicator” shows a sunnier picture of the last three months than the barometer investors typically rely on to gauge cash flows to emerging market, EPFR Global’s cross-border investment index.
IIF economists say markets may be more pessimistic than warranted since the capital-flow data helps investors determine the health of emerging economies.
“This is reason for a certain level of optimism,” said Felix Huefner, a deputy director at the IIF. The group represents over 450 of the world’s largest banks, hedge funds, insurance companies and other financial institutions.
The IIF says its indicator captures a more accurate picture of foreign investment into emerging economies’ bond and equity markets because it relies on two data sets: both EPFR Global input and information published by a dozen emerging markets.
When extrapolated to the top 30 emerging economies, the IIF says it gives a fuller picture of portfolio adjustments because it includes more info on institutional investors such as pension funds and sovereign wealth funds.
The EPFR Global data relies too much on retail investors such as hedge funds, the IIF said. And that matters because retail investors and institutional investors have different investment mandates.
Institutional investors “appear to have maintained their exposure to emerging markets, responding to strategic mandates to gradually raise their underweight allocations,” the IIF said. They are likely behind sustained strong demand for new bond issues, the group said. A spokesman for EPFR Global didn’t immediately comment.
The IIF tracker in this chart, for example, shows a net inflow of foreign investors into emerging economies’ bond markets, rather than the net outflow of capital indicated by the EPFR Global data.
Applying the new model to last-year’s sell-off, for example, dramatically changes the complexion on last-years market volatility.
Instead of a net outflow of capital out of emerging market equity and debt of $73 billion between May and October shown by the EPFR Global data, the IFF’s data shows a net inflow of $81 billion. The IIF says there are clearly some emerging markets legitimately coming under pressure by investors to fix their economies.
But more broadly, many are robust enough to weather the current storm and the group expects total capital flows to gradually pick up over the next two years as global growth strengthens.
The IIF’s picture of flows in 2013 more closely matches the one painted by long-term institutional holders. Many say the re-pricing and correction in emerging-market bonds and equities is an attractive buying opportunity.
These investors believe that emerging-market countries will continue to grow at a faster clip than the U.S., Japan, Canada and developed Europe, especially since many of these countries have already have embarked on reforms and policy fixes that will address their vulnerabilities.
J.P. Morgan Asset Management, for instance, has been adding to its sovereign debt positions, especially Mexico’s dollar debt.
Paul DeNoon, director of AllianceBernstein’s $28 billion emerging-market debt portfolio, said high yields on sovereign debt issued by countries like Brazil, Turkey and Indonesia are attractive.
“A lot of weaker BBB sovereigns are trading like BB or junk-rated credit,” Mr. DeNoon said For example, Brazil’s two-year local currency bond offers a yield of 12.79%, almost the same yield as a Nigeria’s similar-duration bond, according to Markit data.
wsj.com
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