Many investors have been stampeding out of emerging-market bonds, but they’re falling in love with Colombia.
Investors have poured $622.5 million into Colombia’s bond market since the start of the year, the biggest inflow into any emerging-market country so far in 2014, according to fund flow tracker EPFR Global. Colombia has seen significantly more inflows than its peers, as the only other emerging economies with bond inflows this year — South Korea, Poland and Greece – all have had less than $200 million come into their bond markets.
Meanwhile, emerging-market bond funds overall have seen 19 consecutive weeks of outflows this year, totaling $13.8 billion, according to EPFR data.
While EPFR only reflects a small sample of the overall money going in and out of emerging markets, analysts say it could signal that Colombia’s efforts to lure in more foreign investors are paying off. Foreign ownership of Colombian bonds doubled last year, when a law came into effect there reducing the tax foreign investors must pay to hold bonds denominated in the local currency, the peso. Government officials have been discussing further tax cuts for foreign bondholders.
Colombia is also starting from a low base when it comes to foreign ownership of its bonds. Just over 6% of Colombia’s local currency bonds are held by foreign investors, which is tiny compared with nearly 40% in Mexico and around 50% in Peru. As a result, Colombia’s bond market has much more room to mature than many of its Latin American peers.
“There are a lot of things playing in Colombia’s favor,” said Eduardo Suarez, a Latin America currency strategist at Scotiabank. “Overall, the story is quite good. There’s a lot of investment coming in.”
Colombia’s economy looks pretty attractive relative to countries like Venezuela and Argentina, whose economies are under severe stress and where investors face significant government intervention. Colombia’s economic growth is also expected to pick up this year, with subdued inflation, a rarity among Latin American countries.
“They have not lied to the investor base and kept their hands off the corporate sector,” said David Hinman, chief investment officer at SW Asset Management LLC, in explaining Colombia’s outperformance. “That’s how low the bar is [to invest] in Latin America right now.”
Mr. Hinman said he owns Colombian corporate bonds, including Avianca Airlines and Banco Colombia.
Colombia’s government bonds joined the investment-grade club in 2011, with upgrades from all three major ratings agencies. Fitch Ratings and Standard & Poor’s both upgraded Colombia again last year, while Moody’s Investors Service has a positive outlook on Colombia, meaning it could also be poised for another upgrade.
Of course, Colombia is not immune from turmoil in global markets. Like most other emerging-market currencies, the Colombian peso has depreciated against the dollar, down 5.6% so far this year, as the Federal Reserve gradually winds down its stimulus program. That has reduced profits for foreign holders of Colombia’s local bonds.
