FT: US rate uncertainty drives flight from emerging markets
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The moves come as investors consider the potential for two changes to the world economy: a first US interest rate rise in nine years, and a significant moderation in Chinese demand for commodities for the first time in a decade.
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The dollar has strengthened this year and commodity prices have fallen, raising concerns for emerging market countries and companies that borrow in the US currency and export significant raw materials to China.
Outflows have moderated since peaking on August 26, according to EPFR, but redemptions have continued to hit bond funds with a mandate to buy hard currency debt issued by emerging market borrowers in particular, the data provider said.
The Institute of International Finance, which measures cross-border investment movement, has also reported a pick-up in outflows from emerging markets equities and bonds this week, with the total estimated to be around 70 per cent of the magnitude observed during the 2013 “taper tantrum”.
A valuation gap between developed market and emerging market stocks widened over the summer. The price-to-book ratio on the MSCI emerging markets index stood at 1.28 at the end of August, the lowest it has been in more than five years.
Analysts at UBS say sentiment towards emerging markets is in some cases as poor as it was in the depths of the 2013 taper tantrum, with investors concerned about delayed reforms in a number of countries, as well as the prospect of the US raising interest rates.
“We are short emerging market debt in a variety of ways,” said Bill Eigen, fixed income fund manager at JPMorgan Asset Management. “Emerging market commodity exporters have been broadly impacted by the collapse in commodity prices. This, as well as modest global growth, a weaker China, Fed tightening and a strong US dollar, will all be headwinds for most emerging markets. Considering the relatively low compensation, we do not feel the risk-return is attractive.”
Investors also appear to have retreated from stocks in the past week, with $19bn pulled from equity funds globally in the seven days to September 9, according to EPFR.
However flows remained positive for Europe and Japan equity funds and US bond funds recorded back-to-back weekly inflows for the first time since mid-July, EPFR said.
Ahead of next week’s Fed meeting, some money has flowed into US government debt, which may suggest expectations for a rate rise are diminishing as the value of such bonds falls when interest rates rise.
Exchange traded and mutual funds invested in US Treasuries counted $2.1bn in inflows in the latest week, lifting flows to more than $7bn since China unexpectedly devalued its currency in the middle of August, according to data published by fund tracker Lipper on Thursday.
Investors have clamoured for haven assets following the recent market gyrations, with $16.2bn pulled from US-based stock funds in the latest week, including $13.6bn from ETFs invested in stocks.
Treasury returns have since lapped several other asset classes, according to Barclays Indices. Since the year began, Treasuries have returned 1.03 per cent, outpacing the 0.83 per cent return from high-yield debt and the loss of 0.33 per cent on investment grade credit. The S&P 500 has fallen 5.2 per cent this year.
In the latest week, high grade debt funds counted their first inflows since late July, with $416m in fresh cash. Junk bond funds also reported inflows after two consecutive weeks of outflows.
