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Japan funds play safe by turning away from Latin American bonds

Tokyo

THE rebound in Latin American bonds from the coronavirus selloff has attracted investors from around the world. Japanese funds? Not so much.

Money managers from the world's third-largest economy have been trimming holdings of debt from countries such as Brazil and Mexico amid the widening spread of the pandemic in the region and the rising tide of political tensions. Their cautious stance comes even as Latin American bonds have returned yen-based investors almost 7 per cent this quarter, about twice the gain from their global EM peers as measured by Bloomberg Barclays indexes.

"Now is the time to choose safety over winning big in a rebound rally," said Takeshi Yokouchi, senior fund manager in Tokyo at Sumitomo Mitsui DS Asset Management Co, which oversaw the equivalent of US$138 billion as of end-March. "The low yields in Latin American assets are another reason that make them less attractive."

Japanese mutual funds have been net sellers of Mexican and Brazilian bonds every month since at least February, according to a Bloomberg analysis of data from Japan's Investment Trusts Association. They've offloaded a net 4.27 billion pesos (S$264.5 million) of Mexican bonds this year, and 1.09 billion reais (S$286.3 million) of Brazilian debt, the data show.

The world-beating recovery in Latin American bonds from the virus selloff illustrates one of the biggest points of contention in current financial markets. To some it signals the impact of the pandemic was overdone, while others question whether the rebound is justified given that much of the global economy is heading for the worst recession since World War II following economic lockdowns.

The rebound in Latin America is facing a growing threat from the fact that the region is becoming the main global hotspot for Covid-19 cases.

Both Brazil and Mexico announced new daily records for infections last week, while Venezuelan leader Nicolas Maduro said he would "radicalise" lockdown measures in the capital. A resurgence of cases would deepen this year's recession in the region's three largest economies by more than a percentage point, the Organisation for Economic Co-operation and Development said last week.

For Mr Yokouchi, these concerns mean he prefers to put his money into Asia, at least for the time being. "I'm more positive on Asia," he said. "We're seeing faster recovery from the pandemic and the synergy you see from China's recovery is larger." BLOOMBERG

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