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FX & IR EM Strategy Summary

Core Content

This report provides an analysis of foreign investment flows into Emerging Markets (EM) equities and bonds, with a focus on Asia, CEEMEA, and Latin America (LATAM). It highlights the trends in portfolio inflows and outflows, the shift in investor preference from bonds to equities, and the impact on FX reserves. The data is sourced from EPFR, BNP Paribas, CEIC, and other financial institutions.

Main Points

EM Equity Flows

• Revival in Interest: EPFR data for the week ending August 20, 2014, shows a revival of interest in EM equities with inflows accelerating to USD 3.1bn, bringing total inflows since July to USD 16.7bn.
• Equity vs. Bond Flows: Equity inflows continue to more than offset bond outflows (-USD 107mn) for the third week in a row, indicating a shift in support for EM FX from bond to equity flows.
• Regional Highlights:
  • Latam: EPFR data shows continued outperformance of equity flows over bond flows. The bond outflow trend stabilized between August 13th and 20th, with only Colombia posting outflows while Brazil and Mexico saw inflows.
  • Asia: Portfolio inflows accelerated, led by a surge in bond inflows into India. Equity inflows continued to rise, led by the North Asia bloc (Taiwan, Korea), with August MTD inflows reaching USD 3.5bn.
  • CEEMEA: Inflows and outflows were mixed, with Turkey experiencing a decline in foreign bond holdings despite some rollover activity.

EM Bond Flows

• Hard Currency Outflows: Hard currency funds posted outflows of -USD 153mn last week.
• Local Currency Inflows: Local currency funds turned slightly positive (+USD 28mn) after five consecutive weeks of outflows.
• Blended Bond Funds: Blended bond funds saw inflows of USD 31.7mn.
• Regional Highlights:
  • Asia: Bond inflows into India were significant, but inflows into Korean and Thai bonds moderated or turned negative.
  • CEEMEA: Foreign bond holdings in Turkey declined slightly, while South Africa and Hungary saw mixed flows.
  • LATAM: Bond inflows were observed in Brazil and Mexico, with Colombia being the only country with outflows during the stabilized period.

Key Information

• Equity Flows: Inflows into EM equities were a key driver of FX support, surpassing bond outflows.
• Bond Flows: While hard currency funds continued to see outflows, local currency funds and blended bond funds showed positive trends.
• FX Reserves: The report includes data on FX reserve changes in Asia, CEEMEA, and LATAM, indicating some accumulation in the region.
• Data Sources: The report references various data sources, including local stock exchanges, central banks, and financial institutions, with notes on the limitations and caveats of the data.

Regional Analysis

Asia

• India: Bond inflows were a major contributor to the accelerated portfolio inflows.
• Korea: Bond inflows moderated, and equity flows showed a positive trend.
• Thailand: Bond ownership data was limited to government bonds.
• Indonesia: Government bond flows were covered, but not SBI bills and corporate bonds.
• Philippines: Data from the Bureau of the Treasury was only available up to end 2013, with subsequent flows derived from BSP's weekly data.

CEEMEA

• Turkey: Foreign bond holdings declined slightly, but some rollover occurred through Treasury auctions.
• South Africa: Outflows were observed in the week to July 25th.
• Hungary: Mixed flows were noted, with some weeks showing outflows and others inflows.

LATAM

• Brazil: Continued strong inflows into equities and some bond inflows.
• Mexico: Bond inflows were positive, with some weeks showing significant inflows.
• Colombia: Only country with bond outflows during the stabilized period.

Appendix

• Data Notes: The report includes important caveats regarding the data sources and their limitations, such as the difference between daily and monthly data, and the exclusion of certain bond types from coverage.
• Contacts: A list of contacts for the FX & IR EM Strategy team is provided, including strategists and sector specialists in various locations.
• Important Disclosures: The document is noted as non-independent marketing communication and includes legal disclaimers regarding the use of the report and potential conflicts of interest.