The current U.S. economic stance favours a weaker dollar but rising U.S. interest rates – a policy mix that would typically be bad for Emerging Market debt. But the Financial Times reports that the latest EPFR data (https://www.ft.com/content/b242b974-02aa-11e8-9650-9c0ad2d7c5b5) shows a continued appetite for Emerging market and Peripheral Eurozone debt.  The main focus for inflows is local currency bonds, taking advantage of relatively undervalued exchange rates as well as a recovery from a five-year bear market.  But the budget position for Peripheral Eurozone economies is also improving and the truncated ECB bond-buying program has recently concentrated on Spanish and Italian debt.

Bank-sourced data shows a credit improvement for many of these Sovereigns over the past four months,.  In particular, the average level of Sovereign credit risk in the Eurozone periphery has declined by about 15%, with the core declining 6%.  There is a near-identical improvement for the G7 Sovereigns.  Apart from the G7, the full bank-sourced sample of more than 100 Sovereigns shows credit risk to be unchanged in recent months.  But within that large set there has been a broad-based improvement.  Countries like Brazil, Uruguay, Peru and Colombia; Morocco, Algeria, Tunisia, Egypt, Lebanon and Tunisia; Russia, Ukraine, China, Taiwan, Malaysia and the Philippines have all improved.  Across these countries, credit risk has dropped by an average of 6% in the past 4 months.

Some asset managers are nervous about sheer weight of money as the main driver of Emerging Market performance. But bank-sourced data focuses on fundamentals, including fiscal outlook and the synchronised improvement in global growth prospects. Monthly updates to Sovereign trends are available through CB Connect.