FPIs pull out $10.6 bn from EMs

Foreign portfolio investors (FPIs) have sold shares of emerging markets (EMs) worth $10.6 billion in February so far, leading to a steep fall in the benchmark indices across these markets. The MSCI EM index has corrected 4.4 per cent this month. This sell-off was triggered by concerns about US equities and rising bond yields in the world’s largest economy.

Between February 1 and February 8, the US benchmark index Dow Jones Industrial Average fell nine per cent creating a panic among investors. EMs followed suit with South Korea, India and Taiwan falling more than seven per cent from their January highs. Since then, all the EMs except India rebounded partially; Indian indices, however are up just about a per cent.

Usually, the direction of US and the European equity markets sets the pace for EMs. This is due to the massive exchange traded funds (ETFs) which resort to basket buying or selling, whenever there are any positive/negative global cues. Such moves take toll on all major markets.

In the coming days, analysts are predicting a rough ride for EMs on account of multiple factors. Rising bond yields in the US continues to spook equities as investors are seen chasing relatively safer investment options. Also, the recent numbers suggest that the increase in inflation, especially in the US, is higher than expected. This could imply a faster than expected rise in global interest rates. There are also several domestic factors that are plaguing majority of EMs. For instance, the $2 billion fraud in the Indian banking system has also induced more volatility into domestic markets. In Taiwan, analysts have been expressing concerns about the valuations of electronic companies, which constitute bulk of its market representation. South Korea is prone to any escalation in the tensions between the US and North Korea. Last year, there were at least six occasions when heightened tensions between the US and North Korea led to a more than one per cent sell-off in Kospi, South Korea's benchmark index. Global investors have remained bullish on EM equities for the last two-three years, thanks to the near zero per cent interest rate regimes across the developed markets. In 2017, MSCI EM index outperformed the MSCI World for the first time in three years, thanks to the strong portfolio flows. Indian markets gained nearly 30 per cent in dollar terms during 2017 to touch new highs.