Key factor: What could boost local bonds in the future?

Inflows to developing markets at the beginning of the year were the largest in two years.

When explaining the growth of local assets, part of the argument must be found in the dynamics of capital in global markets. So, In order to wait for the return of the upward trend, it will be crucial for capital to show interest in emerging markets again.

There is some consensus that the flow variable has been and will be decisive for local assets, apart from domestic foundations.

the issue of flows

According to the latest official data, emerging market equity and debt capital saw the largest monthly net capital inflows during January in the last two years.

According to data from the International Institute of Finance (IIF), in a report published last weeknet inflows into emerging markets totaled USD 65.7 billion in January.

This figure is significant because it exceeds $30.9 billion in net income for the entire last year.

Capital inflows into emerging debt excluding China reached US$44.6 billion, the highest monthly figure on record for the IIF since 2018.

Debt problems in developing countries were also protagonists.

According to the records of the IIF, in the first week of the year, a record of around 28 billion dollars was recorded in the issuance of government debt and companies with developing markets.

"The apparent slowdown in interest rate growth (in developed markets) and a more favorable outlook have allowed some emerging markets to continue issuing new debt," IIF economist Jonathan Fortun said.

Inflows into Chinese stocks also rebounded strongly last month, generating the largest inflow since December 2020.

Regionally, Asia and Latin America recorded the largest inflows last month at $34.4 billion and $15.9 billion, respectively.

spillover effect

Analysis of flows towards emerging markets is decisive for understanding the movement of local financial assets.

Capital movements are what ultimately determine the price of financial assets.

If flows increase in emerging markets, more and more investors are buying debt and stocks in these markets, so the price of financial assets is expected to rise.

On the other hand, if capital is fleeing emerging markets, it is because there are investors selling debt and stocks in those markets, causing asset prices to fall.

In this context, when the dynamics of debt and capital are analyzed and compared with local assets very similar movement can be seen in the trend of both assets.

In other words, there is a high correlation between emerging debt and Argentine bonds, which is mainly explained by flows.

Ignacio Sniechowski, head of research at Grupo IEB, confirmed that this dynamic indeed appears to be decisive for local debt.

"You can see that the correlation between local government bonds and the emerging debt index was very high during January. The issue of flows has a lot to do with that.. Local idiosyncrasies amplify ups and downs, but flows move in step with trends. When capitals leave for emerging countries, they also arrive in Argentina, and when they leave, they also do so," explained the expert from Grupo IEB.

For his part, Diego Martínez Burzaco, head of strategy at Inviu, agrees that the factor of local asset flows is very important to explain their trends.

"Although Argentina's assets have moved randomly, there is a high correlation with the flows seen in Brazil and Latama. Any inflow of capital into the region, and Brazil in particular, can help local assets out of the macro imbalances we know about."Martinez Burzaco said.

In addition, the expert believes there are arguments for optimism with emerging market assets.

"This could be a good year for emerging countries, given that the market is planning for the peak of rate hikes by developed central banks in the middle of the year. This favors the repricing of the dollar against other assets," he said.

Accordingly, he also added that there is an underlying idea in the market that the global economy is showing more encouraging economic data than expected, along with China's economic reopening.

"These factors could guarantee that the first half of this year will see an expansion in economic activity and put a floor on commodity prices, something emerging countries are heavily dependent on," he said.

Argentine bonds rose 80% between October and December, while emerging markets rose 14% in that period.

Then, with the adjustment, the trend was similar with regard to the time in which it was carried out. From December to today, Argentina's debt fell by 12%, and the debt of emerging countries by 4%.

Balanz's analysts say government bonds are trading in line with lower risk appetite.

"Argentine assets have been impacted by the rise in rates experienced globally and have suffered losses in line with those seen in rising fixed income. The global environment was a dominant factor in bond prices, especially government ones, as they showed declines in line with those observed in the region."they said from Balanza.

local factor

Although the global factor seems decisive to explain the dynamics of local assets, this is still a special year for Argentina because it is an election.

For this reason, there are permanent speculative variables that affect the price of debt and stocks in relation to the political definitions that are expected after the elections. TOSome analysts believe that in the end they even become more determinant than global variables.

Julio Calcagnino, head of the TSA Bursátil team, on the other hand, understands that the flow that confirmed the rise in emerging markets has not significantly affected Argentina.

"The increase in Argentina's debt assets is still only speculative and local. Although we do not have updated data, in September only 35% of public debt belonged to external investors. During the Mauricio Macri government, it exceeded half. We don't believe that has changed during the last quarter of 2022."Calcagnino explained.

TSA Bursátil is cautious about the future of local government debt.

"We are cautious in the short term when it comes to Argentina's sovereign debt and continue to bet on corporate debt in the medium term, closely monitoring sectoral ratios that are separated from the local and global context," Calcagnino warned.