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FX & IR EM STRATEGY Summary

Core Content

This document provides an overview of foreign exchange (FX), equity, and bond flows into emerging markets (EM) as of early January 2014. It highlights the performance of different regions, including Asia, CEEMEA, and Latin America (LATAM), with a focus on the dynamics of capital inflows and outflows, and the implications for market participants. The report is intended as a marketing communication and not independent investment research.

Main Points

EM Bond Fund Flows

• Week of January 1st: EM bond fund flows were subdued, with hard currency bond funds experiencing outflows of about USD 116 million.
• Local and Blend Currency Bond Funds: Saw small inflows, suggesting a potential revival in the coming week due to increased activity in the primary market.
• Asia: Equity flows showed resurgence, particularly in Korea and Taiwan. India had positive debt flows before the payrolls, but other markets remained weak. Price action suggests inflows may be returning.
• CEEMEA: Turkey reported an inflow of USD 900 million into local debt, attributed to offshore branches of Turkish banks. Foreign bank holdings were flat, while non-bank financials declined. Hungary and South Africa saw outflows from local debt by non-residents.
• LATAM: Brazil experienced a decline in foreign flows into local debt in October and November, but Mexico saw increased foreign participation, reaching 41.2% of total local debt. The inflow into Mexico was supported by successful energy and fiscal reforms.

Equity Flows

• Asia: Equity flows were modest, with notable inflows in Korea and Taiwan. Inflows were also observed in India and the Philippines, though they were not consistent across all countries.
• CEEMEA: Equity flows were not as prominent as debt flows, but specific data on Thailand's equity flows showed mild inflows.
• LATAM: Brazil and Mexico had mixed equity flows, with Mexico showing resilience due to policy reforms.

Bond Flows by Region

• Asia: Monthly net bond flows varied by country, with India and Indonesia seeing positive inflows, while Thailand and others showed outflows.
• CEEMEA: Turkey had a notable inflow into local debt, but other countries like Hungary and South Africa had outflows.
• LATAM: Brazil saw a reduction in foreign flows into local debt, while Mexico had increased foreign holdings, indicating continued interest in the region.

FX Reserve Accumulation

• Asia: FX reserves showed a mixed trend, with some countries experiencing increases and others declines.
• CEEMEA: FX reserves in Turkey, Hungary, and South Africa showed varying levels of change.
• LATAM: Brazil and Mexico had notable FX reserve movements, with Mexico showing a steady increase in foreign holdings.

Key Information

• Data Sources: The report uses data from various sources, including EPFR, BNP Paribas, local stock exchanges, and central banks.
• Methodology Notes:
  • Daily data may not be accurate due to reporting limitations and may not reflect actual cross-border flows.
  • For India, FX flows are closely tied to SEBI auctions.
  • For Korea, the data refers to "net purchases" rather than "net investment".
• Foreign Ownership:
  • In Asia, foreign ownership of government bonds (e.g., KRW, INR, THB, IDR, MYR, PHP) varied significantly.
  • In CEEMEA, Turkey had the highest foreign ownership, followed by South Africa and Hungary.
  • In LATAM, Mexico had the highest foreign ownership of local debt, reaching 41.2% in December 2013.

Region-specific Analysis

Asia

• India: Positive debt flows before payrolls, but equity flows were mixed.
• Korea: Positive equity and debt flows, with foreign ownership showing a strong presence in government bonds.
• Thailand: Mild equity inflows, but debt outflows increased, with potential for further outflows if political instability escalates.
• Indonesia: Debt inflows in December were largely from domestic institutions, with foreign selling.
• Philippines: Government bond ownership was reported, with equity flows not broken down.

CEEMEA

• Turkey: Inflows into local debt were reported with a lag, attributed to offshore bank holdings. Foreign bank holdings remained flat.
• Hungary and South Africa: Outflows from local debt by non-residents were observed in January.

LATAM

• Brazil: Inflows into local debt decreased in October and November, with a pause in foreign participation.
• Mexico: Increased foreign holdings in local debt, with a steady participation rate of around 41.37%. A shift in portfolio duration was observed, with a reduction in long-term debt and an increase in short-term debt.
• Colombia: Mixed foreign flows, with some months showing positive inflows and others outflows.

Summary of Trends

• EM Bond Flows: Mixed, with some countries showing inflows and others outflows.
• Equity Flows: Asia showed a resurgence in interest, particularly in Korea and Taiwan.
• FX Reserves: Varying levels of accumulation across regions, with some showing signs of recovery.
• Foreign Participation: Notable increases in foreign ownership in Mexico and Turkey, while other regions like Brazil and South Africa showed outflows.

Contacts

• Emerging Markets Strategy Contacts:
  • Bartosz Pawlowski – Global Head of EM Strategy, London
  • Dina Ahmad – FX & IR CEEMEA Strategist, London
  • Stanislav Petrov – FX & IR CEEMEA Strategist, London
  • Tatiana Tchembarova – CEEMEA Credit Strategist, London
  • Erkin Isik – FX & IR CEEMEA Strategist, Istanbul
  • Mirza Baig – Head of FX & IR Asia Strategy, Singapore
  • Rohit K Garg – FX & IR Asia Strategy, Singapore
  • Jasmine Poh – FX & IR Asia Strategy, Singapore
  • Yii Hui Wong – FX & IR Asia Strategy, Singapore
  • Thiago Alday – FX & IR Latam Strategist, Sao Paulo
  • James Z Hao – FX & IR Latam Strategist, New York

Disclaimer

• This document is a marketing communication and not independent investment research.
• It is not intended to be relied upon as an exhaustive analysis.
• It may be subject to conflicts of interest.
• All information is for the use of intended recipients and may not be reproduced or transmitted without prior written consent.