Appetite for high yield bonds and emerging market corporate debt is much higher than the Pan-European average, and stands in sharp contrast with the dislike of investment-grade bonds.
During our previous poll of the Danish fund buyer community, demand for high yield bonds had shot up from record lows, which has been reflected in strong net inflows. In the seven months to the end of July, high yield bond funds were the most popular asset class with Danish investors, recording a net intake of DKK10.2bn (€1.37bn), according to branch organisation IFB. This stands in stark contrast with last year’s net outflows of DKK4.4bn, and more new money has been flowing into the asset class than in any previous year.
The country’s fund buyers continue to be quite keen on the asset class, especially compared to investment-grade bonds. All investors who were polled are invested in high yield bonds, and only one of them told our researcher he intends to decrease his allocation. Most of the others plan to keep their exposure unchanged, while a significant minority (25% compared to the European average of 16%) intend to up their exposure further in the next 12 months.
EM debt swap
Amid growing concerns about the possible impact of a Fed rate hike on the asset class, interest for emerging market debt with European investors has been slowly fading. The number of buyers has more than halved compared to a year ago, and net sentiment (buyers minus sellers) has turned negative for government bonds. In Denmark however, there is quite a different dynamic.
While fund selectors in most countries do not distinguish too much between the two categories, the Danes do. They had a preference for (local currency) government bonds in February, had become agnostic in March, and have now decidedly chosen for (mostly dollar-denominated) corporate debt. Some 28% plan to increase their allocation to the latter, the second-highest reading in Europe, while a quarter want to cut exposure to EM government debt.
It remains to be seen what effect the devaluation of the yuan, which dropped by more than 2% against the dollar yesterday after the central bank cut its reference rate, will have on emerging market debt though. Currency devaluations in emerging markets usually trigger capital outflows, and a stronger dollar makes it harder for Chinese currencies to service their dollar-denominated debt.