Debt Funds’ Jumbled Jingle
Retail-driven bond outflows continued into year-end at around $50 billion according to EPFR although the 2013 sum was $10 billion positive in contrast to equities on “sticky” institutional allocation still underweight traditional benchmarks. The total was just one-tenth 2012’s record and embraced local over hard currency in reverse preference, as individual investor flight the past six months outlasted the post-crisis 2008-09 period and reflected both Fed tapering and political headline risk aversion. Strategic mandates were steady at a $2-billion plus monthly pace, as US pension funds hold under 5 percent in emerging market fixed-income with an unchanged position since boom times, a recent IMF survey reveals. Foreign accounts are only one-quarter domestic institutions’ over $1 trillion in exposure, while North American, European and Japanese retail vehicles own $350 billion. More liquid sovereigns have suffered $40 billion in outflows since mid-year with corporates down less than $2 billion. ETFs which could have aggravated withdrawal are small at around 5 percent of the universe compared with the 25 percent concentration for stocks. The post-May exit coincided with strong primary market recovery as modest central bank Treasury buying pullback was delayed until December. Near $50 billion in official and $150 billion in company issuance was absorbed, with the latter setting another annual mark at $350 billion. The second half featured African placements from Gabon and Nigeria as regional activity topped $8 billion, with Kenya’s debut set for early 2014. On the EMBI the average yield was over 6 percent as the gauge plummeted by the same amount as a poor-performing asset class. In Q3 trading volume was off 20 percent to $1.25 trillion according to industry monitor EMTA reflecting the temporary corporate pause in particular. Local instruments were two-thirds of volume at $825 billion led by the BRICS, while in Eurobonds the sovereign-business split was 60-40. Active international targets included Brazil, Venezuela, Russia, and Ukraine while India and Turkey ranked also in domestic frequency.
Ukraine teetered between Brussels and Moscow rescues until Russian President Putin won the bidding with a pledge to purchase $15 billion in government bonds and reduce gas import prices. Kiev demonstrators continued to clash with police as the first $3 billion installment was received and the central bank defended the exchange rate peg despite forward depreciation expectations. The stock market remained at the bottom of the MSCI frontier pack with flat GDP growth and farm and metal exports predicted for 2014. Nearby Turkey experienced another crisis bout as non-residents dumped the currency and securities as key ministers resigned in a project corruption probe which may mask a wider Islamic party power struggle between Prime Minister Erdogan and disciples of the Gulen movement. The central bank dipped into reserves again to support the lira at 2/dollar, as Erdogan’s camp decried an “attempted coup” after a previous military and judicial purge dashing EU aspirations recently hailed in spirit.
