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FX & IR EM Strategy Summary

Core Content

This document provides an overview of foreign investment flows into Emerging Markets (EM) equity and bond markets, along with FX reserve movements, as of May 2014. It includes detailed data and analysis on the performance of various EM regions and countries, focusing on the inflows and outflows, the composition of investments, and the implications for local currencies.

Main Points

Equity Flows

• Overall Inflows: EM equity funds saw inflows halved to USD 502mn in the week to May 28, 2014.
• Asia: Portfolio inflows into equity markets moderated. Equity inflows into Korea and Taiwan slowed, while India, Indonesia, and the Philippines saw slight negative equity flows. Foreigners sold Thai equity and bonds for the fourth consecutive week.
• Latin America: Brazil and Mexico continued to attract inflows, with Brazil accumulating USD 1.93bn since the end of March.
• Chart Highlights:
  • Chart 3: Equity inflows for key Asian markets.
  • Chart 5 and 7: Weekly EM equity flows for Asia and Latin America.
  • Chart 20–27: Detailed regional equity and bond flow data for India, Korea, Thailand, Indonesia, and the Philippines.

Bond Flows

• Overall Inflows: EM bond markets saw a 9th consecutive month of inflows at USD 539.39mn, with a one-month rolling inflow of USD 1.48bn.
• Asia: Bond inflows into Korea and India remained strong. The Philippines saw an acceleration in bond inflows after S&P upgraded its rating to BBB. Foreign ownership of Malaysian bonds was unchanged in April, with maturing MGS funds recycled into GILs and BNM bills.
• CEEMEA: Turkey experienced a decline in foreign bond holdings, while Hungary saw minimal net purchases. South Africa saw a surge in equity outflows, affecting the ZAR.
• LATAM: Bond inflows in Brazil were robust, with foreign holdings reaching a new high of 18.8% by April. Mexico and Colombia also showed positive inflows.
• Chart Highlights:
  • Chart 8: Asia bond inflows by currency.
  • Chart 10: CEEMEA bond inflows.
  • Chart 12: LATAM bond inflows.
  • Chart 28–37: Detailed bond ownership and flows for key Asian markets.
  • Chart 40–49: Detailed bond ownership and flows for CEEMEA and LATAM countries.

Key Information

• Inflow Trends: EM bond markets have seen a sustained inflow over the past 9 months, with a notable increase in the one-month rolling inflow.
• Equity Trends: While equity inflows have moderated in Asia, they remain positive in Latin America.
• Currency Impact: Inflows into bond markets have had a positive impact on local currencies, particularly in Korea, India, and Brazil.
• Rating Impact: The S&P upgrade of the Philippines to BBB had a positive effect on bond inflows.
• Data Sources: The document uses data from EPFR, BNP Paribas, central banks, and other financial institutions.
• Caveats: The data may not be fully accurate or complete due to the nature of reporting and the way inflows and outflows are calculated. Some data is based on daily net purchases rather than net investment, which may overstate inflows.

FX Reserve Accumulation

• Asia: FX reserves showed mixed trends, with some countries experiencing growth and others a decline.
• CEEMEA: FX reserves showed varied performance, with notable changes in Turkey and South Africa.
• LATAM: FX reserves in Brazil showed a positive trend, with continuous foreign inflows.
• Chart Highlights:
  • Chart 14–19: FX reserve changes in Asia, CEEMEA, and LATAM.
  • Notes on data: Different countries have different data sources and caveats, including the difference between daily and monthly data, and the impact of auctions and redemptions.

Legal and Disclaimer Notes

• Marketing Communication: This document is a marketing communication and not independent investment research.
• Conflicts of Interest: It may be subject to conflicts of interest due to the strategy teams' interaction with sales and trading.
• Liability Disclaimer: No liability is accepted for any loss arising from reliance on the document.
• Data Sources: The information is based on public sources and may not be up to date or complete.
• Regional Restrictions: The report is intended for professional clients in certain regions, including the UK, France, Germany, Japan, Hong Kong, Israel, Singapore, and Australia, and may not be distributed to retail clients.

Summary

The document highlights the trends in foreign investment flows into EM equity and bond markets, with a focus on Asia, CEEMEA, and Latin America. It provides detailed analysis on the performance of key markets, the impact of ratings and FX reserves, and the importance of understanding the data sources and caveats. The report serves as a tool for professional investors and is not intended for retail clients.