Cash balances in emerging-market debt funds are touching lows notched in the aftermath of the 2013 Taper Tantrum, as investors soak up bumper bond supply and extend bullish positions in obligations issued by sovereigns and corporates alike.
Dry powder among emerging-market portfolios is at just 3.4% of assets, close to levels posted after the tumult that roiled developing-economy assets four years ago, according to a JPMorgan Chase client survey distributed to media this week.
While that makes it harder for fund managers to avoid selling securities if volatility jumps from record lows and redemptions increase, it also underscores bullish expectations that fresh money will keep flowing in over the coming months.
“Cash balances can often move lower in periods of high inflows, where investors see a good pipeline of inflows ahead and markets are performing,” said Jonny Goulden, who heads local emerging-market debt research at JPMorgan in London. “The expected inflows will move portfolios less overweight and will replenish cash balances, so fund managers may be more happy to run lower cash balances in these periods.”
The U.S. lender estimates capital flows to emerging-market debt funds are on track to surpass 2012’s record of $100 billion, citing EPFR data, thanks to commitments from institutional and retail funds alike. It didn’t disclose the total assets under management of clients in the survey.
Money managers in U.S. investment-grade bonds have also whittled cash balances to near post-crisis lows, underscoring bullish positioning in global bond markets as investors luxuriate in a climate of abundant liquidity, low inflation and economic expansion.
The emerging-market supply outlook for the rest of the year looks benign. JPMorgan projects net corporate issuance at just $22 billion for the rest of the year, thanks to an oncoming wave of maturing obligations and coupon payments.
With developing economies facing the prospect of hawkish central bank meetings in the U.S. and euro area over the next month, that dynamic should boost cash flows, and help spur defensive positioning if volatility ticks up.