Emerging market debt and high-yield bonds each saw net flows in excess of €4bn in January. The last time that happened was in March last year. The fund flows pattern of the past three months for the two asset classes indeed looks like a repeat of what happened during and immediately after the market correction at the start of last year.
The strong outflows from the two asset classes in the immediate aftermath of the US election were strongly reminiscent of the sell-off that occurred a year ago. This time however, the correction was much shorter-lived, though emerging market debt prices were particularly hard hit over worries about the impact of Trumpist protectionism.
But such fears have been pushed to the background as Trump hasn’t yet taken concrete steps to implement the protectionist policies he had promised to the American electorate.
As a consequence, emerging market bonds have now recouped their post-election losses completely. And fund flows turned positive in January again too: after €9.3bn of combined net outflows in November and December, the strongest outflows streak since summer 2015, a net €4.2bn flowed into emerging market debt funds last month.
But emerging market debt, the most volatile asset class in terms of fund flows, remains highly susceptible to political volatility: keep a close watch on Donald Trump’s Twitter account to for clues whether you should buy or sell that fund that’s overweight Mexico. And mark tomorrow night in your diary, when the new US president will address Congress for the first time and will possibly give more clues about the implementation of his protectionist agenda.
The return to favour of higher-risk bonds was not the only noteworthy development on the fixed income front in January. Long/short debt funds also saw a return to favour after a lacklustre 2016 in terms of flows. The category saw net inflows of €1.3bn, the highest since May 2015.
It seems the prime motivation of investors to buy long/short bond funds is to insulate against higher bond yields. A similar move into such funds was observed when government bond yields rose in, indeed, the spring of 2015.