beyondbrics

Appetite for EM bonds looks pretty much insatiable at the moment, despite warnings that the outlook for debt isn’t quite as rosy as investors believe.

EPFR, the fund flow monitor, recorded inflows of $701m into EM fixed income funds in the week to Wednesday, continuing the dramatic reversal this year after 2011′s outflows. And Royal Bank of Scotland expects Tuesday’s Greek bail-out to sustain this optimism for some time yet.

Here’s Demetrios Efstathio at RBS:

We believe the current positive theme stays with us for longer. We expect the positive momentum in flows to continue, driven by very good YTD performance of EM bond indices, especially in local currencies. We also think that LTRO 2 will be beneficial towards EM assets, leading to further inflows to EM. Enjoy the ride!

Once again, hard currency bond funds were the big winners, with inflows of 0.9 per cent of assets under management, or $481m in EPFR’s sample universe. Efstathio noted that only high yield bond funds have attracted comparable inflow this year.

It was a slightly different story for EM equity funds - though ultimately, not a bad week. Flows remained positive for the eighth week in a row but the inflow was small, at just 0.05 per cent of AUM ($348m). They still outperformed their developed market counterparts, though, which recorded outflows for a second successive week.

Renda Rundle, analyst at Renaissance Capital, reckoned that risk aversion was creeping into the market. “Despite the significant Greek bailout during the past week,investors did not seem to us convinced that European debt problems were solved,” she said.

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