Central and eastern Europe has failed to win its share of the resurgent capital inflows into emerging markets that have been driven by loose monetary policy in Europe and a more dovish US Federal Reserve in recent months.
February proved an inflexion point for emerging market fund flows. Non-resident fund flows into emerging markets hit a 21-month high of $36.8bn in March following a $5.4bn inflow the previous month, according to the Institute of International Finance.
In its regional economic prospects report published on Wednesday, the EBRD said the main beneficiaries of these fund flows were Asia and Latin America with eastern Europe seeing a continuation of the downward trend.
According to the EBRD, while inflows into emerging Europe were of similar size when measured relative to recipient countries’ GDP, they represented only around half of the levels experienced during the pre-crisis boom of the 2000s.
Greg Saichin, chief investment officer of Allianz Global Investors, said this was in part due to the limited number of investment opportunities in the region. This in turn was because of its size, its stable economic growth, and the fact that the turnaround in prospects for Latin America and Africa, based on the rebound in commodity prices, offered more attractive asset prices.
In addition, most EM funds have a global, rather than a regional remit, meaning that if better value is to be found elsewhere, investors will not be loyal simply to strong credit fundamentals.
“Africa and LatAm lost a lot of flows last year,” Saichin said. “Unfortunately investors tend to take a pan-African view when commodities sell off but with the wheels back in action in China and commodity prices improving, the money is going back into these countries where investors still see value.”
TIGHTER PRICES
Saichin pointed out that primary bond supply from the region had already made up 25% of CEEMEA issuance year to date. “But the yield that you get in those countries in dollars is low, and in euros even lower. They may look attractive relative to core Europe but elsewhere in EM, there is better value.”
Economic growth has been broadly stable in the CEE region with current accounts moving into positive territory. Impressive economic resilience with rising political tail risks has characterised the region for several years leading to tighter asset prices.
In addition, it is difficult for investors to invest directly into the region. Coupled with increasing political risk in Poland, one of the region’s biggest markets, this is beginning to take a toll on buy-side appetite.
The onus may now be on rates buyers to bring liquidity to the region. Latvia was a beneficiary on Tuesday when it printed a €650m 20 year bond at 50bp. Latvia has been predominantly bought by rates buyers since it became purchasable by the ECB under its quantative easing programme in 2015. Previously it was an EM fund play.
Interest from rates buyers is also opening up the long end. The 20 year tenor was something that would not have been available to CEE sovereigns two years ago, according to bankers. Slovenia re-opened two long end bonds on Wednesday.