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Strategies & Market Trends : 2026 TeoTwawKi ... 2032 Darkest Interregnum -- Ignore unavailable to you. Want to Upgrade?

To: THE ANT who wrote (95202)	10/4/2012 3:40:28 PM
From: elmatador	Respond to of 219522

UBS: EM bonds as safe havens October 4, 2012 12:28 pm by Stefan Wagstyl It’s now commonplace to argue that emerging market debt is becoming a mainstream investment for many fund managers. But Bhanu Baweja of UBS says the consensus “massively understates what’s happening”: not only are flows into EM debt growing, as has been widely reported, but they are also changing in nature. What were once investments bought only by the bulls have become an asset for bears, too. In other words, a haven of safety. Baweja says that debt inflows into emerging markets are now four or five times larger than equity inflows, as this chart shows: Source: UBS Baweja adds: Before the financial crisis, and certainly through the depth of it, the nature of these debt flows into EM was quite pro-cyclical. If you were bullish on an economy you bought both its equity and its debt, you just bought more of its debt as time went by. However, more recently there has been a subtle change. It’s not universal and there are not enough data points for us to say it has been firmly established, but we do see it – increasingly the debt flows are becoming countercyclical. Now when investors are worried about global or EM growth they are selling EM equities but holding onto EM debt. In fact they may well be adding to it. As a result, investments in EM bonds are maturing. Before 2011, yields on EM bonds went up in line with US high-yield bonds. Since 2011, the relationship has reversed – EM bonds yields tend to fall when US high-yield yields rise. At times of extreme market turmoil – when US high-yield spreads over Treasuries exceed 700 basis points – the new relationship breaks down, as investors start selling EM bonds in their anxiety. But, most of the time, “EM has grown up, and its ability to take pain has risen”. If all this is true, says Baweja, it has an impact on EM currencies – making them less volatile. This is because as capital flows become increasingly countercyclical they will offset rather than magnify changes in the current account. Here is a chart that tentatively suggests it might be happening: Source: UBS Meanwhile, Baweja’s colleagues in another part of UBS have published a long-range overview of EM currencies, looking at their growing stability. Here’s a chart which shows why many investors are still worried about losing their shirts in EM markets: Source: UBS And here’s another showing why others are changing their minds: Source: UBS Of course, the starting point is quite helpful. If the authors had gone from 1997 – before the Asian and Russian 1998 financial crises – the gains would not have looked so great. But EMs learnt from 1998 and the world has changed out of all recognition in the past decade, including for EM currencies.