EM bond gains follow foreign sales

SINGAPORE: Selling by foreign funds most often results in gains for investors during the following three months, according to a Bloomberg analysis of six emerging-Asia debt markets.

Investors who bought when outflows climbed above the fiveyear average made a positive return at least 77% of the time between September 2015 and October 2019, versus a 64% chance of making a profit for all trades during the period, the study found.

When outflows climbed to 1.75 standard deviations above the average, the chance of a positive return jumped to 84%. On the flip side, investing at times of rising inflows frequently ends up being a bad idea, according to the study that looked at Thailand, Indonesia, the Philippines, Malaysia, South Korea and India.

When net purchases climbed to 0.5 standard deviations above the five-year average, 47% of investments lost money in the next three months. This compares with an overall loss rate of 36% for all observations. When inflows increased to 1.25 standard deviations above the average, the chance of losing money rose to 53%.

The counter-intuitive nature of the findings highlights the difficulty of judging when to invest in EM debt, particularly during periods such as the current coronavirus outbreak.

The recent escalation in the epidemic — which has spread from China to such far-flung countries as Italy and Canada — has sparked risk-off sentiment that has seen foreign outflows from stocks in all six countries in the study this year, while there remains a net inflow into their bonds.

At the same time, the extra yield, or carry, for putting money into the six countries may encourage investors to maintain positions for longer, especially with the decline in US treasury yields.

Investors may also decide to hold on because of optimism that the virus outbreak will lead to further interest-rate cuts from central banks. US 10- and 30-year yields hit record lows last week.

The study looked at bond flow data and the spread of markets in terms of involvement by foreign investors. Global funds own as much as 38% of Indonesia’s outstanding local-currency sovereign debt, compared with as little as 3% of India’s.

Current and historical figures were then analysed to generate z-scores, which show how far a data point is from the mean. If there was a bond outflow, or negative z-score, and there was a positive return three months later, this would count as a “win”. A bond inflow that led to a negative return counted as a “loss”.