Investors Upbeat Despite Subdued Flows

With EM debt seeing slowing inflows and some managers seeing outflows, investors remain positive towards the asset class. EM bond funds posted a net inflow of $2.32bn for Q1 2011, according to EPFR, a shadow of the $11.54bn recorded during the comparable period last year. “There is still a need for income,” says Paul Denoon, head of EM debt at AllianceBernstein. “For fixed-income it is an issue of relocation,” the investor says, explaining that there may be more funds going into products other than straight EM, such as multisector funds with an EM component. The slowdown in flows is not a major concern at this point, he says. “Interest is still high in EM,” says Denise Simon, EM portfolio manager at Lazard Asset Management. She says investors are still underexposed to and interested in EM, and describes the slowdown as “natural” and “healthy.” Alberto Bernal, head of research at Bulltick, notes that many local pensions in LatAm are investing less in EM assets and more in cheap US assets. EM performance is lagging as well. EM external debt has returned just 1% this year, compared to 4% for US high yield, 4% for EM equities and 6% for the S&P 500, according to HSBC. Optimism about a US recovery may be diverting funds away from pure EM bond investment and could pressure the asset class further if it is joined by US rate hikes expected later this year, Pablo Goldberg, head of EM research at HSBC, says. He notes that too little US growth is also unfavorable, as US and China are still key drivers for EM economic performance. All spoke on an EMTA panel in New York Monday. Panelists saw the EM debt benchmarks returning 4%-6% this year, and local currency benchmarks returning about 7%.