EM Debt:Technicals Monitor June 2017

Summary:Technical conditions are strong for the EM credit markets underpinned by strong inflows and likely better supply/demand balance during the rest of the year. EM sovereign sold USD14bn during the month, bringing YTD issuance to USD107bn. We have revised our full year issuance volume forecast from USD118bn to USD142bn. EM hard currency funds took in USD5.2bn (3 AUM) in June, bringing YTD inflows to USD25bn (16% AUM).

    Inflows keep coming in.

    The weekly inflows streak of EM hard currency funds continued in June, extended to 26 weeks. EM hard currency funds took in about USD5.2bn (3% AUM) during the month, while local and blended currency funds absorbed USD2.5bn (2.3% AUM) and USD0.2bn (0.5% AUM), respectively. Within hard currency funds, the bulk of inflows (in dollar amount) went to GEM focused funds, adding USD4.7bn (3% AUM) while Asia focused funds took in USD0.5bn (3%AUM) in June. In terms of sovereign vs. corporate, sovereign focused funds witnessed a surge in inflows absorbing USD3bn (5% AUM), as compared to the corporate focused funds which attracted USD0.8bn (2.6% AUM). Outside EM, US High Yield funds didn’t add much, while US IG Corp funds took in 2.5% AUM.

    For the first half of the year, EM bond funds attracted USD43bn (13.6% AUM) with a similar pace for the first and second quarter. Year-to-date, hard currency funds aggregated about USD25bn (16% AUM), in comparison to USD13.5bn (13% AUM) for local currency funds and USD3.7bn (7.5% AUM) for blended currency funds. The “run rate” of cumulative inflows (in %AUM) this year is the second highest in the past five years - it surpassed 2016 levels by a large margin and is only slightly lower than record 2012 levels (second chart on the right).

    Lower core yields keeps primary market buoyant.

    Issuers continue to tap the primary market supported by favorable technical conditions and lower core yields, as EM sovereigns sold close to USD14bn of bonds in June.

    Notably, Argentina surprised the market with USD 2.75bn offering of 100Y bond. In EMEA Russia sold USD3bn in 10Y and 30Y benchmark bonds just before US announced a possible increase in sanctions. Elsewhere, Chile, Ivory Coast and Belarus also came to the primary market.

    We revise our full year projections.

    The total issuances in the first half reached USD107b (net supply of USD47bn), out of which about two-third came from EMEA region, primarily from the middle-east issuers. In light of prevailing favorable technical conditions and that run rate so far has exceeded our expectations, we revise our full year issuance volume forecast from USD118bn to USD142bn, with USD35bn to be sold during the second half of the year. This represents almost flat net supplies, given that there is a total repayment of USD33bn (principal + interest) for the rest of the year.

    Funds positioning heavier.

    Our mutual fund beta measure that gauges the sensitivity of large funds performance against their benchmark indices again climbed back to 1.2 (overweight), after falling down to 1 during the middle of the June. The portion of top 20 funds that outperformed benchmark was 50% in June.