EM assets manage small bounce at end of 'brutal' week; outflows seen from EM bond funds

By Christine Van Dusen

Atlanta, Sept. 23 - Emerging markets assets were battered on Friday, as the week ended on a "brutal" note and managed only a minor rebound by the end of the session, with limited liquidity and some forced selling.

"All told it was a brutal end to a very heavy week," a trader said. "At mid-morning today we saw any meaningful bid in the market hit. It didn't matter what the credit or the tenor was, it was hit - scariest day since early 2009. As the day progressed we've seen a slight improvement in bids and risk appetite. Not sure we are out of the woods, but at least we have seen some improving bids."

Said another trader, "The bubble has burst for EM. Much as EM has better fundamentals than developed markets, the external debt markets are not designed for when people look to sell into weakness."

Most names with a technical bid were down 2 to 3 points, he said, and weaker names were down as much as 7 points.

"A liquid bond like Vimpelcom has traded at 85, 84, 83, 82, 81 and now 80," he said.

The Russian issuer's notes closed at 82 bid, 83.5 offered.

"It's weak again as the market gets the sniff that there may be a few forced sellers out there," a trader said. "But there is some liquidity, at least."

Funds long on cash

One trader mustered up some optimism on Friday.

"Two or three things make me just slightly more positive than earlier in the week," he said. "Firstly, a lot of funds and accounts have been preparing for this and hence were long cash. Secondly, today we definitely saw some forced and panic selling - the market needs to see that before the market can have any bounce - and thirdly, in the Middle East, it's hard to fault too much the fundamentals and ratings. Plus the fact that locals regionally still feel long on cash, which is good so long as they aren't too spooked from events this week."

Higher-beta names will still struggle, though, he said, and names like Kuwait's Kipco are very tricky.

"I'm a little wary of some headlines over the weekend and suspect that is why we have rallied into the close," he said. "But ultimately how many more bullets do the Fed, E.U. and powers-that-be have? Let's see what Monday brings. One thing for sure is it will bring more volume and more confusion into the market."

Buyers for Emaar, Emirates

In other trading on Friday, some better buying was seen for Emaar Properties and Emirates airline while Lebanon managed to hang in there, particularly on the long end.

"Wider yes, off the highs of last week," a trader said. "But you still have to say it's not doing too badly, given some of the moves on the other credits out there."

Meanwhile, it was "utter carnage" by Friday for most names in the Middle East and North Africa.

The trader said the "tone, flow and sentiment is just horrible. There are a few low-ball bids on credits such as Abu Dhabi Commercial Bank, National Bank of Abu Dhabi, Abu Dhabi Islamic Bank and Abu Dhabi, but that's about it. Africa has checked out of the game. The illiquidity there is brutal. No stone has been left unturned. So while the fundamentals are good, and while the region is away from the European mess, once again the liquidity void and forced selling takes over."

Sharjah stands out

The week's best performer among EM names was probably Sharjah Islamic Bank, a trader said, which had been lifted as high as 105 on Thursday.

"And First Gulf Bank's 2016s closed at 100.25 bid, 101 offered, which is not bad, considering," he said. "We had the pure panic and sheer scariness in the market today so think we can try and consolidate a little here."

By the close of the session on Friday, there was some bouncing as European banks rallied on rumors of some form of financial assistance similar to the United States' TARP program. Ukraine's 2021s closed at 93.5 bid, 94.5 offered while Russia's Gazprom saw its 2022s end the day at 96.5 bid, 97.5 offered.

Turkey in focus

South Africa saw its 2022s end the week at 110.5 bid, 111.5 offered. And Turkey's 2021s finished Friday at 99.25 bid, 101.25 offered.

"Although Turkey is smacked badly, it continues to be a sector of amazing outperformance," a London-based analyst said. "The resilience of and squeeze on some of the Turkish banks amazes me. In the midst of the chaos some Akbank 2018s and 2015s came out and banks' bids disappeared. However, as soon as we reached a bit of broader stability, prices on the banks came back on the screens."

Garanti Bankasi AS' were lifted at 92.75, he said.

EM bond funds see outflows

In other news on Friday, emerging markets bond funds recorded outflows of $691 million for the week ended Sept. 21, according to a report from data tracker EPFR Global.

Of those outflows, $463 million were attributable to funds with local currency mandates.

"Investors erred on the side of taking money off the table during the third week of September ahead of the U.S. Federal Reserve's latest policy meeting as growth in key markets continued to slow and the euro zone debt crisis showed no signs of abating," EPFR said. "Eight of the nine major equity fund groups tracked by EPFR Global posted outflows during the week ending Sept. 21, as did six of the seven major fixed income fund groups."

The outflows from EM bond funds were the biggest reported by major bond funds, the report said.

"The prospect of even looser monetary policy in key developed markets, and the economic weakness behind it, saw emerging markets bond funds post the biggest net outflow in dollar terms among the major bond fund groups," EPFR said. "Institutional redemptions from these funds, which have acquired a degree of safe-haven status this year, were the highest since early second-quarter 2009."

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