Following the record annual fund outflows of US$27bn in 2015 (using weekly data), 2016 has been no different. EM debt-dedicated fund outflows have totalled US$2.4bn in 2016. So far, this has nearly all been driven by hard currency (outflows of US$2.2bn), with smaller outflows from blend funds (US$0.7bn). Local currency funds have actually seen aggregate inflows of US$0.4bn YTD, with only the recent week seeing outflows .
Broader measure of portfolio flows into EM shows more outflows from equities and stable debt flows in 2016 (see page 4): Our EM Daily Flow Indicator (now on Matrix Matrix), which captures EM portfolio flows, shows overall outflows resuming in 2016 after a brief respite into the new year, though debt flows remained stable. Our tracker has recorded aggregate outflows of US$6.7bn YTD following US$5b of outflows in December and US$10b in November. However, recent outflows have been entirely from EM equities, while EM debt flows remained mildly positive (US$1.5b YTD).
Hard currency funds went into 2016 with market-weight exposure and high cash balances: Hard currency funds increased their cash balances by 0.2% in December, to 5.7%, slightly above the long-term average of 5.1%. While the beta of funds increased to a market-weight allocation on aggregate in December, this was largely driven by changes in volatility of the individual countries as opposed to actual fund position changes. Overall, funds remain overweight LatAm (Mexico and Brazil in particular) and underweight CEEMEA and Asia. By rating, the main change in the past six months has been an increase in allocation to single B credits at the expense of BBB credits.
Three weeks into 2016 , hard currency technicals still look challenged: The high volatility, negative returns and fund outflows remain clear challenges at the start of 2016, with decent cash balances and market-weight exposures only partial offsets. The primary market has so far lagged previous years given January tends to be one of the most active months as sovereigns and corporates front load their funding needs. Given the high amortisations in 1Q16, this will have added some support to the market. However, this means that issuance activity is likely to pick up once the market volatility reduces.
Local currency technicals still worse than hard currency: Cash balances as of January 1 stood at 3.4%, down 0.6% on the month, and below the long-term average of 4.7%. Exposure vs. benchmark stands at slightly overweight, leaving little room to add further risk. Exposure to Brazil fell to the lowest level in the history of our sample, 0.7% overweight. Finally, total returns are again challenged by further EMFX weakness, something we think is unlikely to change.
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