COP – Our trading desk has seen inflows from RM, HFs, and Corps today, however they do not seem to be in line with the price action throughout the session. Although seeing choppy movement, CLP remains down against the USD along with the rest of the LatAm complex. Colombia’s industrial production was reported, which fell more than economists expected in August, down -4.6% versus consensus of -1.4%. Our trader is watching 4,200 and 4,160 as supports and dm200 (4,426).
What are foreigners doing with their TES bonds?
The latest round of COP underperformance has also been partly attributed to an ongoing
reduction in TES exposure by foreign investors. Our GBI-EM Positioning Lowdown showed
that as of the end of August, real money investors were still ~2% overweight TES versus
the benchmark, putting TES among the most owned bonds by this group, after Brazil’s,
Mexico’s and South Africa’s (at ~4% versus the benchmark as of end-August).
That said, foreign ownership data of local bonds provided by the Treasury show that
foreigners have sold ~COP 11 trillion of TES this year, half of which (~COP 5 trillion)
occurred in September, amid the broader duration sell-off. Although foreigners were the
largest net buyer of TES from 2020-22, they were the biggest seller of local bonds this
year, and the speed and size of the September sell-off likely pressured COP significantly.
Local pension funds seem to have absorbed most of the year-to-date sell-off.
We note that foreign ownership of local bonds now stands at 22%, while local pension
funds own almost 30% of the outstanding local bonds.
Dislike: We do not expect much support for COP from the recent rise in oil
prices, as it has been mostly driven by supply factors. In addition, our models
suggest that valuations continue to look very expensive, despite the recent
correction, and we do not think that this is warranted by Colombia’s weaker
fundamentals, but we wait for slightly better levels to engage in shorts.
While IBR valuations currently look somewhat attractive versus both US rates
and Colombia’s own neutral rate estimate, we prefer to remain sidelined for
now. Our economists do not expect BanRep to deliver a rate cut until
December at earliest, and we think that the main driver of price action should
remain core rates.
Colombia:
On Wednesday the August economic activity will come out (BNP: 0.35% m-o-m). The print follows relevant downward surprises for retail sales and industrial production pointing to further underperformance of the economy. Given the strong hawkish guidance provided by BanRep in its September’s meeting, it is unlikely that the print leads the market to increase the probability of a cut in the upcoming October’s policy decision. We expect the central bank to start the easing cycle in December acknowledging that risks remain skewed for a further delay on the back of the still elevated inflation.
This week the debate on the health reform will continue. The market will pay attention to the fiscal breakdown of the reform (to be presented at some point by the Ministry of Finance) to gauge its potential fiscal implications and its impact on local assets.