WisdomTree: Emerging Market Fixed Income: Focusing on Flows

ETF Trends

2013 was not a good year for performance in emerging markets (EM), emerging market fixed income or fixed income in general, outside of U.S. high yield. Interest rates rose, EM currencies generally weakened against the U.S. dollar, and investors were more upbeat about prospects in the developed world than those in the emerging world.

While we will provide a more in-depth analysis of specific emerging markets in an upcoming blog post, we thought it might be useful to put 2013 in context of money flows to potentially understand where the market is positioned at the beginning of 2014. Simply put, when there are more sellers than buyers, prices tend to fall. At the most basic level, flows can be a driver of asset prices.

According to J.P. Morgan, in 2013 flows into emerging market fixed income occurred at the slowest pace since the global financial crisis. All told, only $9.7 billion flowed into dedicated emerging market fixed income strategies last year, well below the $40 billion historical average run rate 1 . On the WisdomTree front, the Asia Local Debt Fund (ALD), Emerging Markets Local Debt Fund (ELD) and the Emerging Markets Corporate Bond Fund (EMCB) had net inflows of only $84 million 2 .

However, some interesting and noteworthy trends emerged in 2013 for the asset class. The wide-scale redemptions of emerging market debt generally occurred from retail investors ($9 billion in outflows), whereas many institutional clients took advantage of the increase in relative yields to reduce structural underweights to EM debt. All told, institutional accounts accumulated an estimated $20 billion of emerging market debt in 2013 3 .

In spite of the disappointing 2013 performance, there were a few additional bright spots that emerged from the emerging markets. Emerging market corporations came to market last year with a new record annual issuance of $359 billion 4 . Again, it was predominantly institutional investors that were taking down this record supply.

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