NEW YORK, Aug 21 (IFR) - A handful of buyside firms are seeing opportunity and remain determined to stay the course even as many other investors made a large-scale retreat from the asset class this week.
Retail accounts took out some US$2.49bn from dedicated EM bond funds this week - the largest weekly outflows recorded by EPFR since January 2014.
A confluence of events are turning up the heat once again in emerging markets. The devaluation of the yuan is causing greater concerns about an economic slowdown in China and the subsequent impact this might have on commodity prices, which have already taken a massive tumble this year.
That combined with the looming prospects of rate hikes in the US, a possible intensification of conflicts in Korea and the Ukraine, and rising political risks in Turkey and Brazil have only served to weaken stocks, credit and FX markets across the EM spectrum.
LatAm commodity names took a bashing this week after US crude hit six-year lows on Thursday. The 2020s issued by Ecuador, where oil accounts for about 52% of its exports, have fallen 3.3% since Wednesday to trade today at 85.20.
Other oil-related credits have also slipped this week, with the 2025s issued by Colombia’s Ecopetrol dropping about a point over the week to 93.875.
It is a similar story among Brazilian corporates, which have been the clear underperformers for the region, in some cases gapping 100bp over the last several weeks.
The 2024s issued by state-controlled Petrobras, which has been at the center of a corruption scandal, are now trading at around 620bp-610bp, some 60bp wider to levels seen earlier this month.
The gloomy backdrop has left many on the buyside licking their wounds and reluctant to step forward for fear of taking further losses. But some are seeing opportunity.
“If you are portfolio manager who is measured by yearly returns, you are really scared to go into the market,” said a trader. “But if you are buying bonds with a longer term horizon, there are a lot of options.”
Local currency paper is already drawing attention of some accounts who think that the double digit yields on offer are likely to compensate for further FX volatility and rising political risks in countries like Brazil and Turkey.
Yields on Brazilian local currency NTN-F 2025s are now near 14%, while in Turkey similar 10-year paper has breached the 10% mark for the first time ever, said Bryan Carter, head of emerging markets debt at Acadian Asset Management.
“A risk premium has appeared over the last few weeks due to politics, bringing those deals out of kilter with the fundamentals,” he said.
Klaus Spielkamp, head of fixed income sales at Bulltick, said clients are also trying to source Real-denominated paper
“At this level you get bonds with a high-yield and provides some protection against devaluation,” said Spielkamp. (Reporting By Paul Kilby; editing by Shankar Ramakrishnan)