5 Jul 2019 10:58

Demand for EM bonds sustained; capital flowing out equities but Russian share prices unaffected - BCS

MOSCOW. July 5 (Interfax) - Demand for emerging market bonds was sustained in the week ending June 3 but the same can still not be said of equities, BCS chief strategist Vyacheslav Smolyaninov said in a report.

Net capital inflow into Russia's stock and bond markets through funds, including all funds that invest in Russian equities and bonds, rose to about $30 million in the week June 27-July 3, from $10 million the previous week, EPFR Global data show.

"Capital continues to flow into EM and Russian bonds and out of equities, although this is not affecting prices: the Russian stock market is setting new multi-year records each day. We still anticipate a convergence between flows into bonds and equities and note that data for inflow via funds cannot explain the rally of recent weeks," Smolyaninov wrote.

Net capital outflow from Russian equities through funds, including all funds that invest in Russian stocks, totaled $40 million in the week, compared to outflow of $90 million in the previous week. Funds that invest only in Russian equities saw outflows of $10 million, as in the previous week.

"In the past week, GM funds lost another $621 million, and capital continued to trickle out of funds investing in Russia. The EMEA leader was Saudi Arabia, which had inflows of $258 million, down from $530 million the previous week: investors continued to put money into the country ahead of the second phase of its inclusion in the MSCI EM and in light of new reports about a Saudi Aramco IPO. Meanwhile outflows from EM and Russian equities have lasted 20 weeks without a marked effect on share prices, which are reaching new highs," the analyst wrote.

Inflow of capital into Russian bonds through funds, including all funds that invest in Russian bonds, amounted to roughly $70 million in the week ending July 3, down from $80 million the previous week. There was negligible net outflow from bond funds focused only on Russia.

"The situation in bonds looks more positive from the point of view of capital flows: inflow from GEM funds was $1.6 billion. EM bond and equity flows have been diverging for several weeks, which is a rare occurrence," the report said.