Emerging market outflows biggest since 2016 US election

Investors have started pulling out of emerging markets with the biggest slump in portfolio flows since the 2016 U. S. presidential election, according to analysts at the Institute of International Finance.

Asia has taken the brunt of the reversal with South Korea, Indonesia and Thailand seeing the biggest outflows of the countries in the study. Those withdrawals have been concentrated in equities, while bonds have been hit less hard. India is bucking the trend with continued demand for both stocks and bonds.

IIF analysts say the countries they are tracking registered nearly $4 billion in outflows since flows turned negative on Jan. 30. Some $3.4 billion of that has been from equities.

"While we remain generally optimistic on EM flows this year, downside risks should not be understated," IIF analysts led by Fiona Nguyen wrote in a note. "A sustained global equity market sell off would clearly be one such downside risk."

Meanwhile, Asian equity markets tend to track what happens in the U.S. more than most, and Tuesday was no exception.

Just a few hours after the late-in-the-day plunge that saw the Dow Jones Industrial Average slide as much as 6.3 percent, bourses over the other side of the world started to open, taking their cue from New York to provide Asian traders with their own whiteknuckle ride.

By the end of Tuesday, Japan's Nikkei 225 Stock Average -- more closely correlated with the U.S. than other markets in the region -- had entered a correction, while the Hang Seng Index in Hong Kong was down the most since 2015, as gauges of volatility throughout Asia spiked.

As U.S. index futures signaled another session of pain ahead there, the MSCI Asia Pacific Index was down 3.5 percent as of 4: 25 p. m. in Hong Kong, concluding a three-day rout that erased an advance this year that topped 8 percent.

"This is a test of nerves," said John Padilla, head of equities at Metropolitan Bank & Trust Co. in Manila. "But if you look through the chaos valuations have become reasonable so it's a good opportunity for the strong-hearted. The bias has been for investors to stay cautious and wait for the selloff to blow over."

Just what triggered the selloff is up for interpretation, with the lack of a specific catalyst leaving some traders bewildered and wondering what comes next. Investors in Asia are reacting in different ways, with one of the world's top-performing macro hedge funds, Asia's PruLev Global Macro Fund, actively managing risk after starting to pare down shares a few weeks ago. At Janus Henderson Investors in Singapore, a fund manager has boosted defensive stocks, while a Thai brokerage is asking clients to hold on to cash.

In terms of what comes next, Tuesday's plunge pushed the Asia Pacific gauge's 14-day relative strength index below 30, the level that traders typically see as a sign of excessive losses.

While some analysts said the pace of the market's slump caught them by surprise, they pointed out that conditions may have been ripe for an adjustment after its rapid advance.

The Nikkei Stock Average Volatility Index surged the most since 2013 after its counterpart in the U.S. -- the VIX - - jumped by record.