Abe No Friend to Emerging Bonds as Nikkei Jumps Most Since 1972
Emerging-market bonds are losing their allure among Japanese investors as Prime Minister Shinzo Abe’s stimulus policies drive the biggest domestic stock rally in four decades.
Investors in the world’s third-largest economy bought a net 1.8 trillion yen ($18 billion) of debt in Asia, Latin America, Africa, Eastern Europe and Russia during the first nine months of 2013, Ministry of Finance data show. That is less than half the amount purchased in each of the last three years and is on course to be the smallest annual total since 2009.
“Sales of emerging-market bond funds, which used to be quite popular, have been sluggish,” said Koya Iwabuchi, Tokyo-based general manager of the Investment Trust Marketing Group No. 1 at DIAM Co. Ltd., which oversees 11.8 trillion yen, said in an e-mail interview on Nov. 25. “We introduced two active funds on Japanese equities in May” to meet a pickup in demand for the products, he said.
Since Abe took office on Dec. 26, the Nikkei 225 Stock Average (NKY) has gained 53 percent and is set for the biggest yearly advance since 1972. So-called Abenomics, a mix of fiscal and monetary policies aimed at spurring growth and ending 15 years of deflation, weakened the yen 15 percent this year to the benefit of exporters including Toyota (7203) Motor Corp. and Panasonic (6752) Corp. The measures come just as the U.S. is preparing to rein in stimulus that fueled a flow of funds into developing nations, driving their borrowing costs to a record low in May.
Local-currency notes of developing nations have already lost a record 8.4 percent this year in dollar terms, JPMorgan Chase & Co.’s GBI-EM Global Diversified Index shows.
To revive an economy that’s averaged 0.6 percent growth in the past 15 years, Abe announced a 10.3 trillion-yen spending boost in January. In April, Haruhiko Kuroda, his handpicked Bank of Japan governor, doubled monthly bond purchases to more than 7 trillion yen in an effort to deliver a 2 percent inflation rate in about two years. Consumer prices excluding food and energy increased 0.3 percent from a year earlier in October, the most in 15 years, data showed today.
Toyota’s shares have climbed 59 percent this year, set for the biggest advance since 1999. Asia’s biggest carmaker raised its net income forecast this month by 13 percent for the year ending March 2014. Panasonic, Japan’s largest consumer-electronics maker by market value, doubled its profit estimate last month and the shares have surged 125 percent, headed for the best annual gain on record.
Carry-trade returns using the yen as a funding currency dropped in the second half of this year from the first and Japanese money managers have cut holdings of local debt in developing nations. The trades involve borrowing funds in countries with low interest rates and investing the money in higher-yielding assets elsewhere.
Benchmark five-year bonds yield 0.17 percent in Japan, compared with 12.48 percent in Brazil, 4.69 percent in Mexico, 9.2 percent in Turkey and 7.91 percent in Indonesia, according to data compiled by Bloomberg. The developing countries’ bond markets are the four most popular with Japanese investors.
Yen-funded carry trades involving purchases of Brazilian real returned 3 percent to investors since June, down from 7.9 percent in the first half, data compiled by Bloomberg show. Returns for the Mexican peso fell to 3.5 percent from 16 percent, while for the Turkish lira the gain shrank to 2.1 percent from 9 percent. Indonesia’s rupiah swung to an 11 percent loss from a 14 percent return.
“If you are a Japanese investor, why would you want to put your money overseas to pick up marginal yields with far higher risks when actually you’ve got much stronger performing domestic markets with no foreign-exchange risk,” Simon Derrick, the London-based chief currency strategist at Bank of New York Mellon Corp., the largest custody bank with $27.4 trillion under administration, said in an interview in Singapore on Nov. 21. “There is less sign of outflows from Japan than there has been in times past.”
Assets in the DIAM Japan Value Equity Fund increased about 27 billion yen this year to 33 billion yen, according to data provided by the company. Those in the DIAM Emerging Sovereign Open Class (BRL), which invests in the dollar-denominated bonds issued by developing nations and convert the proceeds into Brazilian real, saw assets drop about 35 billion yen to 98 billion yen.
Japanese holdings of Brazilian debt fell 19 percent this year to 1.22 trillion yen in October and reached 1.14 trillion yen in August, the lowest since November 2009, according to the Investment Trusts Association of Japan. Ownership of Mexico’s debt dropped 17 percent to 252 billion yen from a record 305 billion yen in May, while that for Turkey’s declined 16 percent to 138 billion yen from a peak of 165 billion yen in May. Holdings of Indonesia’s slid 20 percent to 123 billion yen since reaching a record 154 billion yen in May.
The yield on developing nations’ local-currency bonds reached a record-low 5.16 percent on May 9 and has since surged 163 basis points, or 1.63 percentage points, to 6.79 percent as of Nov. 28, JPMorgan GBI-EM Global Diversified Composite Yield to Maturity index showed. The 10-year U.S. Treasury yield rose 93 basis points to 2.74 percent in the same period.
Japanese funds may step up purchases of emerging-market debt in the second half of 2014 as developing nations’ borrowing costs rise in tandem with U.S. yields, Vishnu Varathan, a senior economist at Mizuho Bank Ltd. in Singapore, said in a phone interview on Nov. 26.
“Japanese investors are looking for more attractive levels to get in,” he said. “We are still looking at a very gradual and modest recovery” for the developing world next year, Varathan said.
Emerging economies will expand 4.5 percent this year and 5.1 percent in 2014, the International Monetary Fund predicted on Oct. 8. Growth in developed nations is forecast to quicken to 2 percent from 1.2 percent.
About $10 billion, or 3.2 percent of assets under management, have been taken out of emerging-market debt funds this year, including $37 billion since May, Rashique Rahman and Vandit Shah, New York-based analysts at Morgan Stanley, said in a Nov. 26 report.
Japanese investors will continue to look overseas for investments, though are likely to cut purchases of higher-yielding securities, according to Takahide Irimura, the Tokyo-based head of emerging-market research at Kokusai Asset Management Co., which manages $37 billion, said in a Nov. 27 phone interview.
“Fund flows to emerging-market bonds will be more selective than before, and massive inflows into broad emerging-market bond markets will not be repeated until we get a clearer picture of U.S. monetary policy,” he said.