Thursday, March 25, 2010

Market Technical Watch Local Currency Exposure at its Highest Research Global $SPY

  • Share of local currency-denominated funds of total funds’ assets under management reaches new historical high at 36.9%.
  • Cash balances of EM-debt dedicated funds increase to 3.7% of assets under management, still a very low level however by historical standards.
  • EM funds’ exposure to BB-rated countries increases (from 4.2% to 2.3% underweight) at the expense of investment-grade credits (which drop to 4.5% overweight from 6.3%).
  • On the month, the most significant changes in cash exposure were seen on Brazil (+0.55%) and Hungary (-0.20%).
  • On balance, net beta exposure versus benchmark remains close to neutral.
Market Technical Watch
  • EM debt-dedicated funds’ gross exposure is still on the rise as investors’ appetite for the asset class remains strong. In nominal terms, EM funds’ exposure rises by 3.2% on the month and by 28.5% since July last year (source: EPFR) – see graph page 6.
  • Despite the rally, EM funds remain cautious in adding beta-risk exposure (only 2.1% risk- overweight versus benchmark – see graph of positioning beta on the left. Per country, beta-risk exposure increases mostly for Venezuela (+2.3%), and decreases for the Philippines (-2.3%). Note that the increase in Venezuela risk exposure is largely due to a drop in the country’s volatility: funds being largely underweight the credit, a reduction in the credit’s volatility mechanically decreases EM funds’ underweight risk exposure on the country – see graph of aggregate positioning beta exposure on the left and page 5 for breakdown by countries.
  • Cash balances rise to 3.74% from 3.06% of assets under management (AUM), a moderate increase however when considering the very large fund flows of the last few weeks (+3.2% on the month). By historical standards, cash balances remain very low – see graphs page 6.
  • For the first time since October last year, cash exposure to investment-grade credits drops substantially (from 6.3% to 4.5% overweight). BB-rated credits largely benefited from this shift as exposure to the rating class rose from 4.2% to 2.3% underweight, exposure to single-B credits remaining stable at around 2.2% underweight. – see graphs page 6.
  • By reaching 36.9% of AUM (+0.37% on the month), share of local currency-denominated funds reaches new historical high – the previous high was observed in August 2008 – see graphs page 6.
  • In cash terms, the most significant increase in exposure is for Brazil (+0.55% on the month). On a three-month basis, the countries showing the biggest increases are Mexico (+1.06%), Indonesia (+0.40%) and Poland (+0.24%) - see page 5 and pages 7-10.
  • The biggest monthly decreases in cash exposure are for Hungary (-0.39%), Argentina (-0.34%) and Russia (-0.23%). Over the last three months, the countries showing the highest decrease in exposure are El Salvador (0.33%), South Africa (-0.26%) and Hungary (-0.20%). – see page 5 and pages 7-10.
  • Argentina is still the biggest overweight credit by EM debt-dedicated investors (1.9% overweight on a simple average basis), followed by Kazakhstan (1.2%) and Indonesia (1.2%) – note that Indonesia is particularly overweight by US accounts (1.7%) compared to European accounts (0.1% overweight only). The biggest underweight credits are Turkey (3.9% of AUM) and the Philippines (3.1%) – see graphs page 3.

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Market Technical Watch

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