JPM Cuts Peru, Colombia Debt Technicals

An increase in local markets exposure and reduction in cash balances has prompted JPMorgan to cut its assessment of external EM debt technicals to positive from very positive. It dropped Peru to negative from neutral as investors sharply hiked exposure. “Peru spreads trade well inside their current credit rating, reflecting strong expectations of an imminent upgrade to IG by a second agency (Fitch already rates them BBB-), but with Peru’s weight in IG indices significantly smaller than for Brazil, should they qualify, the arguments for forced buying of Peru to minimize tracking error are weaker,” says the shop. It revised Colombia technicals to negative from neutral as exposures continue rising, while Venezuela was chopped to neutral from positive. JPMorgan adds that the remaining $18bn in scheduled sovereign debt issuance will be met by index cashflows of a similar magnitude. According to JPMorgan, inflows for the past month totaled under $1bn, the bulk of which was invested in local markets. It estimates year-to-date inflows into EM FX and fixed income from strategic and retail sources at $9bn. JPM also revised its full year 2008 inflow forecast to $30bn from $40bn. “External debt inflows have disappointed thus far this year, and outright outflows were even seen in retail external debt mutual funds. However, we remain optimistic on inflows into local markets,” says the shop.