EM Fixed Income:Let the flows in

Inflows into EM fixed income continued over the summer. The total amount invested into the 18 EM countries included in our “Fixed Income Positioning” Monitor has reached USD780bn (+80bn YTD), the highest level in history. However, while the overall share of foreign holdings - now at 15.5% - also further increased (0.7pp YTD), it is still below the peak (17.0% in Jan-15).

    Flows into EM regions remains divergent - the trend spotted in recent months has not changed; while the share of foreign holdings stands at a new record-high in EMEA (28% and +4pp YTD) - mainly driven by inflows into Czech, Egypt, South Africa and Russia - the share is well below the peak in Asia (currently 9.2% vs. 10.2% in mid-16), and at the lowest level since Q1-13 in LatAm (18.9%). Although Peru continues to benefit from inflows, the continued decline in Brazil and of late, Mexico, both weigh on the overall share of foreign holdings in LatAm.

    Despite USD4.4bn YTD outflows, the total amount invested by foreigners remains highest in Brazil (131bn), followed by Mexico (119bn/+1.2bn YTD) and South Korea (72bn/+5.6bn). The total amount invested by foreigners remains compared to its peers’ low in Romania (6bn/+0.6bn YTD), Israel (8bn/+0.7bn), and despite significant inflows in Egypt (local bills: 10bn/+9.4bn).

    The share of foreign holdings is highest in Czech (46%/+14pp YTD), followed by Peru (46%/+8pp YTD), Malaysia (40%/-7pp YTD) and South Africa (40%/+4pp YTD). In contrast, the share is lowest in India (4%/0pp YTD), Israel (6%/0pp YTD) and South Korea (14%/1pp YTD).

    In the spotlight...

    Our “Positioning” Monitor - analyzing the share of holdings relative to history and peers - reveals positioning in South Africa, Czech and Peru as crowded, while it is particularly light in Brazil, India and Thailand.

    Across EM, Egypt saw the largest increase in the share of foreign holdings YTD. The share increased from 1% in Dec-16 to a significant 21% as of end-June. In YTD $ moves, this accounts for an increase in foreign holdings by USD10bn, topped only by India (+15bn) and Czech (+13bp). In our “Positioning” Monitor, Egypt is now ranked in the bottom half (relatively crowded).

    Compared to our Jun-17 publication, Thailand improved the most in our ranking (less crowded). While it was ranked 7th last time, it is now ranked 3rd. The overall share declined from 16.3% to 15.8% currently, and is now once again close to the lowest level since Q1-13.

    Despite an unchanged share of foreign holdings compared to our Jun-17 publication, Poland deteriorated the most in our ranking (more crowded). While it was ranked 9th, it is now ranked 11th.

    The changes in the positioning ranking are somewhat different when comparing current levels to our EM Scorecard published in Dec-16. Since then, positioning has improved most (less crowded) in Malaysia (+6 ranks) and Israel (+4 ranks), while it has deteriorated most (more crowded) in Turkey (-6 ranks) - driven by noticeable inflows over the last couple of months, Poland (-5 ranks) and Czech (-5 ranks).

    Hungary in EMEA, Brazil in LatAm and Malaysia in Asia are the only three countries that have seen net-outflows YTD. While the share of holdings remains compared to peers relatively high in Malaysia (40%) and (but less so) in Hungary (29%), it is low - historically and compared to peers - in Brazil (13%).