Posted inEmerging MarketsEquitiesFixed Income

Fed rate hike prospect hits EM debt flows

In the first ten days of November, $5.5bn was withdrawn from emerging markets mutual funds and ETFs combined, equal to 0.5% of total assets under management. The new figures dash hopes of a revival in fortunes for the region. Outflows had decreased in October after the Fed decided to once again postpone a long-awaited rate hike.

While institutional investors sold off emerging market bonds in a similar pace as in October, they consolidated their equity holdings after a sharp sell-off in October.

Taking a look at recent performance of emerging market debt, the sceptics deserve some understanding. Depending on the currency perspective, returns have been rather poor (in euros) or absolutely dramatic (in dollars) in the few past years. But you can also look at that from the bright side, of course.

In this age of yield starvation, many investors might feel compelled to invest more in higher coupon debt. Karl Dasher, co-head of fixed income at Schroders, appealed to this feeling today at the investment manager’s International Media Conference. “Non-investment grade emerging market corporate bond spreads are now wider than at almost any time [79%] in the past 5 years,” he said. Though there are of course reasons for this, not least the Fed’s hiking plans, EM bears might do well keeping this in mind.         

Part of the Bonhill Group.