Traders work on the floor of the New York Stock Exchange, November 16, 2010.
Credit: Reuters/Brendan McDermid
LONDON |
LONDON (Reuters) - Emerging debt returns have nosed out their equity counterpart so far this year but stocks may be set for a strong finish due to a flood of cheap U.S. cash and capital controls that have made foreign bond purchases costlier.
In absolute terms, investment into emerging equities continues to dwarf emerging debt inflows.
But for investors fleeing ultra-low interest rates in more mature economies, fixed-income assets issued by emerging-market borrowers in local currency became irresistible, offering richer and more predictable returns than equities.
JPMorgan's GBI-EM local-currency debt index saw total returns of 15 percent year-to-date while its EMBI Global Diversified index which tracks emerging sovereign dollar bonds have generated 14 percent.
Both of those outstrip the 13 percent total return seen on emerging equities over the same period.
In 2009, emerging equities more than doubled the total returns of emerging sovereign bonds with a 79 percent windfall. Equities have born the brunt of market volatility this year, however, and investors have responded to economic uncertainty by committing funds to fixed-income assets more consistently.
Signs are that emerging stocks are rotating back in to favor despite the recent selloff on global markets.
"External emerging debt spreads have rallied so much this year to such narrow levels that there's little left to go," said RBC Capital Markets emerging markets strategist Nigel Rendell. "From this standpoint, emerging equities look attractive."
INFLATION BOOST
Data from funds flow tracker EPFR show inflows into emerging equity funds for the week ended Nov 17 slowing to a trickle of $447 million in the face of renewed investor jitters over sovereign debt in the euro zone.
This compares poorly to a $2.7bn weekly average over the previous 24 weeks but favorably to the net $1.38 billion that was pulled out from hard currency funds over the same week.
Flows into local-currency emerging bond funds are still holding up, amounting to $462 million compared to $572 million the previous week.
But global inflationary pressures are set to grow as the U.S. Federal Reserve unleashes its second round of stimulus to quicken the flagging pace of U.S. economic recovery.
In anticipation, fund managers are paring back on global debt holdings, according to Bank of America-Merrill Lynch's November fund manager survey.
The poll also found a net 56 percent of global investors overweight global emerging market equities, their second highest reading ever.
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