Investors accelerate withdrawal from emerging markets
The investor withdrawal from emerging markets accelerated over the last week, with equity funds suffering their worst outflows in nearly a year and bond funds losing money for a third week running — the longest streak of withdrawals since late 2016.
Rising US Treasury yields and the dollar’s renaissance — triggered by concerns that the Federal Reserve might raise rates more aggressively than previously expected — have ramped up pressure on emerging markets. Jpmorgan’s EM currency index is down over four percent since the beginning of April and bond and stock markets in the developing world are lower, according to FT.
“EM financial markets have steadied today, but the moves over the past few weeks have been relatively large compared with the other Fed-related sell-offs over the past 18 months,” William Jackson, a senior economist at Capital Economics, said in a note to clients.
Despite nudging higher for four days running, the FTSE Emerging index remains over 10 percent below its late-january peak, and the Embi Global benchmark of EM bonds had lost value for 10 consecutive days leading up to Wednesday, to sag to its lowest since March 2017.
Although many analysts predict that the rout will soon abate, the turbulence of the past few weeks — which came after an ebullient 2017 and euphoric start to 2018 — has soured investor appetite for Em-focused mutual funds and exchange traded funds.
EM equity funds had outflows of $1.6 billion in the seven days to May 9, the first weekly outflow since February and the biggest since August 2017, according to EPFR, a data provider. Broadly-focused ‘global EM’ funds were the worst-hit, with investors withdrawing $1.1 billion. That was the largest weekly outflow since the market turbulence of December 2016.
Fixed income funds focused on the developing world saw their outflows accelerate. Investors withdrew $2.1 billion from EM bond funds, the third consecutive week of outflows and the worst one since February. EM debt funds have now suffered outflows of over $4 billion since mid-april.
Argentina has been at the center of the EM turbulence, with the government calling on the International Monetary Fund for help after its currency plunged almost 18 percent this year to a new record low.
Turkey, another big developing country with a sizeable current account deficit, has also been hit hard, but the weakness has been broad-based. Every major EM currency except the Russian ruble and Philippine peso has lost ground versus the dollar over the past month.
Many analysts remain optimistic that this is an interruption of the EM rally rather than its end. They point to robust economic growth and better current account deficits in developing countries than at the time of the ‘taper tantrum’ caused by the Fed’s plans to end quantitative easing in 2013.
“EM fundamentals, improved valuations following the market weakness, and expectations of a developed market growth rebound in the second quarter keep us hopeful that the sharp EM correction seen in the past month will prove to be an opportunity to add rather than the beginning of a protracted unwind,” analysts at Jpmorgan wrote in a note.