By David Yong Nov. 2 (Bloomberg) -- Investors should take advantage of any dips in emerging-market bonds by adding to their holdings because global funds are likely to pump more money into the securities through early next year, according to Morgan Stanley. Funds focusing on these assets have moderate risk levels against their benchmarks and the balance of demand and supply remains supportive of further price gains in the coming weeks, London-based strategists Rashique Rahman and Regis Chatellier wrote in a research report dated Oct. 30. Developing nations’ debt slumped in the past three weeks as concern about the strength of the global economy’s recovery from a recession curbed risk-taking. Investors demanded a yield premium of 3.20 percentage points over U.S. Treasuries to buy emerging-market sovereign debt as of 10:15 a.m. in London, according to JPMorgan Chase & Co.’s EMBI+ Index. The spread fell to 2.90 points on Oct. 14, the least since August 2008. “The end of the year is traditionally favorable for fund inflows as strategic mandates are made,” Morgan Stanley said in the report. “Bouts of weakness, such as the one just experienced, are to be expected and should be bought into, with a view to further asset price gains into early next year.” The MSCI Emerging Market Index of equities fell 0.6 percent to 909.05 today, headed for the lowest close since Oct. 5. South Africa’s rand slumped, leading declines among 25 emerging-market currencies tracked by Bloomberg. The currency fell as much as 6 percent to 8.2811 per U.S. dollar, the lowest level since July 15, before trading at 7.8800 as of 12:08 p.m. in Johannesburg. Fund Inflows Cumulative fund inflows into emerging markets have reached $8.1 billion since July, Morgan Stanley said, citing data published by Cambridge, Massachusetts-based EPFR Global, which tracks $10 trillion of assets worldwide. The trend of low-yield money-market outflows and the inflows into high-yielding assets remains in place, the U.S. lender said. The share of investment-grade, higher-quality debt has increased as a proportion of total allocations in funds dedicated to riskier assets in developing nations, according to Morgan Stanley. “This suggests that emerging-market funds will still need to add exposure to be in line with their benchmark,” the strategists wrote. Sales of dollar-denominated bonds by governments and companies in emerging markets amounts to $151 billion so far this year, versus $64.6 billion in 2008, according to data compiled by Bloomberg. This year’s tally will be the highest total for any year since at least 1999. Malaysian oil company Petroliam Nasional Bhd. and the governments of the Philippines, Sri Lanka and Brazil are among the sellers. Redemptions The average rating of new bonds issued this year has been BBB+, which is three levels above the BB+ average rating of the main emerging-market indexes, Morgan Stanley said. As they are added to fund portfolios, it has the effect of raising the credit quality and reducing the extent of the funds’ risk relative to their benchmark, the bank said. The EMBI+ Composite Index, which tracks total returns on the foreign-currency debt of developing nations, reached 496.10 on Oct. 14, the highest close since JPMorgan started compiling the benchmark in 1993. It’s since slipped 1.9 percent to 486.90, trimming this year’s advance to 24 percent. Morgan Stanley estimated sovereign bond redemptions at $1.2 billion and corporate debt at $6.4 billion for this month, compared with its forecast for debt sales totaling $5 billion. “We do remain concerned about possible indigestion for emerging-market credit of massive new supply but this is a consideration for the first and second quarter next year,” Morgan Stanley said. “So long as prospects for global recovery remain intact, the abundant global liquidity will increasingly flow to higher-yielding asset markets.”

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