- Data published this morning shows that EM bond funds saw their biggest weekly outflow on record (in absolute terms) at USD3.2bn. As we have highlighted in our fund flow report last week the serious underperformance of JPM-GBI vs. the UST will likely lead to outflows from EM bond funds. Data published this morning confirmed our view.
- The currency breakdown shows that the local currency bond funds took the biggest hit with USD1.68bn outflow. Dedicated hard currency funds saw outflow of USD1bn whilst blend currency EM funds saw an outflow of approximately USD500mn. Following today’s data EM fund funds remain net receiver of USD9.8bn YTD whilst they received USD35bn last year.
- In terms of what is next for EM bond fund flows we note that our key leading indicator for EM fund flows (the relative performance between JPM-GBI and UST) has improved this week (see chart 1). JPM-GBI was up 1.3% whilst UST 10y was down 1.1%.
- We also note that relationship between this leading indicator and EM local currency bond fund flows seems to be the strongest without lag and 1week lag and starts to fall rapidly beyond two weeks lag (see chart 2). In case the market can stabilize further next week we expect fund flows to stabilize within around 2weeks.
- Looking ahead we believe the key will be how broad based in the USD appreciation and how much it hurts the relative performance of EM fond funds. As our chart shows only 2 weeks of relative outperformance might be enough to stabilize the EM bond fund flow backdrop.
- We note that fund flow situation in EM equity funds seems to be much more stable: EM equity funds saw an outflow of USD2.6bn whilst DM equity funds saw an outflow of USD5.4bn. Looking at relative flow backdrop of EM versus DM suggest that EM equity fund flows “outperformed” in the last few weeks.
Click here to read the full report:
http://www.easyforexnews.net/wp-content/uploads/2011/09/fund_flows_30092011.pdf
Gyula Toth
UniCredit Research