LatinFinance - November/December 2013 - 16

Jan DeHn, asHmore Investment management

"The enTire premise of ThaT
speculaTive money going
inTo emerging markeTs in
april is gone"
he says.
But since the fed's September surprise delay to tapering, "a
new layer of froth may be forming" as investors have ploughed
back into emerging markets bonds and currencies, Kemen says.
"People that are using what could be a short-term window for risktaking. We don't know if it's a three-month, six-month, nine-month
window, but they have the mindset that it's a short to medium-term
investment and they will again be the first to leave."
edwin Gutierrez, portfolio manager at aberdeen asset
management, which manages $312 billion, says that although the
sell-off provided an opportunity to recalibrate a portfolio that may
have been light on local currency debt, the extent of the renewed
enthusiasm remains source of concern.
"i'm always afraid when you get this coalescence around one
view," he says. "it's rally on. Guys are in position for it, guys are
chasing the market. that's the consensus view - so that's what
concerns me."

Here to stay
Yet a significant part of the money coming back into local currency
debt today is of a different character to the fast money that rushed in
earlier in the year, abad says.
"When you have a delay in some of these risk milestones, any
delay of that nature gives the market a chance to find its footing, and
people try to take advantage of it and to claw back some of those
losses," says abad. "But people are not piling back into emerging
markets. they're not reducing their underweights indiscriminately.
they're being more selective now."
Jan Dehn, head of research at ashmore investment management,
says a sell-off of the kind seen in the summer of 2013 is unlikely
to happen again if the fed starts paring back its bond purchases
because the major technical unwind has already taken place.
the ferocity of the sell-off in may and June, Dehn says, was the
result of a "technical overhang" caused by hedge funds that got
caught out on a giant bet that Japanese investors would pour into
emerging market debt following the Bank of Japan's pledge in march
to do "whatever it takes"- including doubling the money supply - to
fight deflation.
they got it wrong, Dehn says, and with Japanese accounts still
on the sidelines when taper talk began - and thereafter yet more
bearish following a slump in the nikkei index - the stampede
of hedge fund money out of the asset class triggered a massive
technical rebalancing in the market.
"the entire premise of that speculative money going into
emerging markets in april, the entire premise for that speculative
trade is gone," he says. "You're not going to see a huge sell-off in em
assets."
the result, says Dehn, is "the cleanest technical position that
we've seen since '08, '09. Relative value speaking, em local bonds
are dirt cheap. and it's all for technical reasons."
Real money is here to stay when it comes to local currency debt,
he says. ashmore, whose investors are 90% real money accounts,

16 l atinfina nce.com - November/December 2013

saw its assets under management remain flat at $77 billion from the
first to second quarters of 2013, only to increase to $78.5 billion by
the third quarter, in the wake of the summer sell-off.
"this is the first time ever that we've seen a really big material
sell-off in em not causing real money to sell," he says. "the reason
is because there is nothing wrong with em. there is absolutely no
crisis whatsoever. nothing material fundamentally has happened in
em- except em has just gotten cheaper."

Finding the trail
comprehensive data on money flowing into or out of local currency
debt in latin america is hard to come by.
ePfR, which collects data on fund flows globally, shows steady
outflows from latin american local currency bond funds for most of
the year, with the exception of a few weeks of modest inflows early
in the year and a single week - in early September - when close to
$200 million flowed in.
But the data only tells part of the story, given the paucity of bond
funds focused exclusively on latin america.
Data from the institute of international finance (iif) shows
foreigners continued holding around 35% of mexican pesodenominated sovereign bonds in the first half of the year, while flows
to Brazilian real-denominated debt have increased.
Portfolio managers suggest that while some retail investors have
withdrawn money in the wake of this year's volatility, institutional
accounts largely kept their strategic allocations to local currency
debt steady.
"from an institutional standpoint, there's a lot of interest in the
asset class," says aberdeen's Gutierrez. "We're as busy as we've
ever been for the past five years ironically even though the fixed
income bull market is over. Guys can buy now with the confidence of
knowing they're not at the top, because the top was earlier this year.
this is a second shot at the asset class."
the argument that very little institutional cash pulled out of local
currency debt is supported by HSBc data on foreign holdings of
government debt.
"Since [the end of may], we have seen net positive inflows from
foreigners into local government bond markets in Brazil, mexico,
and colombia, while Peru has been flat in terms of foreign flows,"
says Kemen. "Despite the negative price action in latam currencies
and local bonds during the US treasury sell-off, there has been an
absence of large outflows from local markets that you would have
expected."
international investors have increased their holdings of Brazilian
government debt by $17 billion since may alone, Kemen notes.
this suggests that investors were not discouraged by sluggish
economic growth in Brazil; moreover, it also indicates that the
government might have succeeded in winning back investment by
removing a 6% iof tax on portfolio flows.
across the region, foreign portfolio capital continues to flow in.
Since 2009, investors have bought $60 billion worth of mexican
government securities, during the course of three consecutive
quantitative easing programs. although the pace appears to have
slowed in 2013, $2 billion has nevertheless flowed in since may,
according to HSBc data.
meanwhile, investors have become more enthusiastic on
colombia's market since the government moved to cut a 33%
withholding tax on offshore accounts. for investors in most
jurisdictions, that is now 14%.
international holdings of local law colombian paper have fallen

http://www.LATINFINANCE.COM

LatinFinance - November/December 2013

Table of Contents for the Digital Edition of LatinFinance - November/December 2013