Investors pile into emerging market bonds as Delta variant spreads

Singapore

EMERGING market investors have been pouring money into bonds and cutting back on stocks in a trend that's set to intensify as the Delta variant of the coronavirus ravages developing economies with low vaccination rates.

Bonds have seen net inflows for 11 straight months, the longest streak in Institute of International Finance data going back to early 2018. They surged to a net US$99.2 billion in the six months through June, versus net equity withdrawals of US$2.2 billion, according to the data, which tallies emerging markets excluding China.

Equities have not attracted more money than bonds since November, when vaccine progress and Joe Biden's election as US president boosted optimism towards the global economy.

The picture won't change anytime soon because Delta variant risk to emerging markets hasn't been fully priced in yet, said Paul Sandhu, head of multi-asset solutions at BNP Paribas Asset Management Asia. The money manager, based in Hong Kong, favours the long end of the curve in high-yield emerging markets such as Russia, Colombia and Turkey.

Pictet Asset Management's Arun Sai also said he favours emerging market bonds over stocks. Emerging market equities only attract sustained inflows when they offer a superior outlook to developed markets, according to Mr Sai, who is a senior multi-asset strategist in London.

An MSCI gauge of emerging market equities is down almost 9 per cent from this year's mid-February peak, while a JPMorgan Chase index of their dollar bonds is up 5 per cent from a low touched in early March. A measure of local currency emerging market government debt has gained about 2.7 per cent from a late March trough.

"Bonds remain key portfolio diversifiers for many investors, and emerging market debt provided very attractive yields," said BNP's Mr Sandhu. "Conversely, equity inflows were highly concentrated towards the US markets, rather than emerging markets." BLOOMBERG