As would be expected at this time of year, lighter issuance across fixed income markets has provided positive technical support in the past weeks. In emerging markets, issuance has remained very light, with only two new relatively small sovereign issues from the Dominican Republic and Angola over the past five weeks. Our in-house retail fund flow monitor has also flagged a reversal in the flow picture in recent weeks. From the beginning of July, emerging markets have seen, on aggregate, around USD 1.3 billion inflows, which although relatively small, presents a substantial change from the total outflows of around USD 16 billion that we saw between February and June this year. Positioning surveys, especially on emerging market currencies, point to far cleaner positioning as non-dedicated investors have reduced their exposure to emerging markets over the past months.
What does this mean for fixed income investors?
Recent emerging market outperformance doesn’t come as a surprise given broadly encouraging fundamentals and attractive valuations, especially relative to developed markets. Improved technicals have also been supportive for emerging market debt. However, while the rally has the potential to persist, we don’t expect valuations to reach the levels seen in late January this year, as rising trade tensions, tighter global financial conditions and idiosyncratic EM risks all continue to pose both short-term and longer-term downside risks.
About the Bond Bulletin
It has been a challenging first half, with political and other idiosyncratic risks dominating headlines and provoking the return of volatility, perhaps earlier than we anticipated. However, given the magnitude of some of the moves, we believe valuations are now starting to look attractive, as much of the fallout from negative headlines and geopolitical risk is already priced in to the markets. With a level playing field, the second half should provide plenty of chances to turn the game around.
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