Fate of flows
Despite currency weakness, particularly in late Q1, emerging markets’ local fixed income has performed reasonably well so far in the year. Driven by dovish global central banks, the rally in core rates and overall inflows into EM local debt, year-to-date, all EM fixed income markets in the Barclays/Bloomberg Index have provided positive duration returns - with the exception for Turkey and Argentina. After massive outflows in mid-2018, the stabilization in foreign flows - which started in Dec. 2018
- has continued in Q1 2019. Overall, foreigners bought $18 billion of local debt with the total amount invested now at $618 billion. This said, the share of foreign holdings in emerging markets has remained unchanged at 28.4 percent. Despite the recent overall inflows, year-on-year, the total amount invested by foreigners is still down $4 billion and the share 1.5pp. While it increased in LatAm (+0.2pp to 53.7 percent) and in Asia (+0.2pp to 22.6 percent), it declined once again in CEEMEA to 24.5 percent (-0.3pp).
This is the lowest share in CEEMEA local bonds since Jan. 2017 and of late mainly due to outflows from Turkey and Poland. Since the start of the year, across emerging markets, Peru, Egypt and Russia saw the largest increase in the share of foreign holdings. This said, Egypt and Russia are still down 13pp and 8pp respectively, compared to 12 months ago. Outflows in Turkey and Poland have continued this year (-2.1bn and -4.1bn, respectively) and the share of foreign holdings is now at record low levels in both countries (despite some minor inflows into Poland in March). Overall, the share invested by foreigners into emerging markets’ local government bonds remains the highest in Mexico (61 percent), Brazil
(53 percent) and Peru (51 percent) while the lowest in Turkey (15 percent), South Korea (15 percent) and Israel (7 percent). The share of foreign holdings is close to the 6-year peak in Israel (-0.6pp below), South Korea (-1.0pp) and Thailand (-0.7pp). However, it is significantly below those levels in Hungary (-28pp), Brazil (-21pp) and Poland (-16 percent). (May 3)