HOT MONEY FLEEING NEGATIVE YIELDS SHELTERS IN OUTER MONGOLIA

It’s going to the world’s riskiest markets, where at least investors are getting paid for the risks.

Since Britain’s June 23 vote to exit the European Union, dollar bonds of El Salvador, Mongolia and Zambia have returned more than 6.7 percent, exceeding any debt market in the world. Finisterre Capital turned a profit on Iraqi bonds, NN Investment Partners is bullish on Cameroon and Ukraine, and Aberdeen Asset Management Plc is struggling to find sellers of African debt.

“Brexit has triggered another round of yield searching,” said Marco Ruijer, who oversees about $7.5 billion of emerging-market debt at NN Investment in the Hague, who also likes Zambia. “There have been big inflows into emerging-market debt and investors need to put some money to work. Everything is just buy, buy, buy at the moment.”

Investors flooded emerging markets with $18 billion of cash after the U.K. referendum damped bets Federal Reserve policy makers will be willing to raise interest rates this year amid stagnating global growth. While the first flurry of post-Brexit buying focused on bigger countries like Brazil and Mexico, money managers are now turning to the overlooked, exotic fringe as a refuge from negative rates in the developed world and yields in emerging markets near the lowest in three years at 4.38 percent.

The three top-performing bond markets since Brexit have credit ratings at least three levels below investment grade and yield as much as 10 percent, according to a Bloomberg sovereign bond index. 

“Everything is rallying at the moment, so you have to be more discriminating now than in the past few weeks,” Damien Buchet, a money manager at Finisterre Capital in London said in an interview in London on July 13. The hedge fund sold Iraqi bonds after they rallied to 79 cents this month, from 69 cents at the start of May.

The strategy of following hot money into the emerging world does leave investors vulnerable to sentiment that can turn overnight. Turkish local-currency bonds have lost 8.1 percent since a botched coup attempt on July 15, wiping out four months of gains in three days. Markets in Brazil, South Africa and Poland have also been caught in selloffs linked to political turmoil in the past year.

Yet stability and safety are no longer a given even for advanced nations. Brexit has exposed the EU’s vulnerabilities, while France has been targeted by a wave of terror attacks and the U.S. elections are creating uncertainty.

These unknowns in the developed world are only making the world’s biggest investors more bullish on riskier markets. BlackRock Inc. is positioning for a “great migration” into emerging nations by money managers fleeing negative rates. Since Brexit, the yield on Mongolian dollar bonds maturing in December 2022 dropped 240 basis points to a one-year low of 7 percent.

“People are saying, well how actually is the U.K. shooting itself in the head economically going to impact Mongolia?” said Jan Dehn, head of research at Ashmore Group Plc, which manages $51 billion of emerging-market assets. “The big shift out of developed markets and into emerging markets hasn’t really happened yet.”

Source:http://www.bloomberg.com/news/articles/2016-07-20/negative-yield-exiles-find-shelter-in-el-salvador-to-mongolia