Word on the web: Cracks emerging in market trends

After years of impressive growth, emerging market funds are suffering their biggest outflows since the financial crisis. But why the sudden loss? And which market will be the first to fall? 


Factors at faultIn an article for Business Insider UK, Portia Crowe reveals that investors pulled $9.3bn from emerging market funds last week – the biggest loss since the financial crisis.  
Crowe shares the findings of Ankur Patel, Chief Investment Officer at R-Squared Marco, who claims the shock can be attributed to a number of factors. According to Patel, approximately 70% of the week’s outflows came from China, most probably due to “the global-index complier MSCI’s decision not to include Chinese shares in its benchmark index”.  
of last week’s outflows came from China

The jump in bond yields in developed markets has also played its part, Crowe notes. “The European Central Bank had essentially been flooding the market with euros by buying up German bunds, and asset managers were investing their euros all around the world, including in emerging-market assets,” she writes. But as that trend started to reverse, “all this liquidity moved back into just plain cash – plain euros,” Patel explains.

Currencies are also to blame. Patel tells Crowe that the strong US dollar has led to a depreciation of emerging-market currencies. “Emerging market investors experience a loss of capital because the currency they’ve invested in is worth considerably less,” he says.

Business Insider UK comment

First to goRather than considering the factors that contributed to this plunge in investment, City AM columnist John Hulsman looks at the potential impact. In particular, Hulsman focuses on Turkey, which he suggests will be the first of the “emerging-market dominoes” to fall. 

In a column predicting the economic outlook for 2015, published in December of last year, Hulsman had a hunch that Turkey would emerge as the weakest player in emerging markets. Following the electoral defeat of President Recep Tayyip Erdogan last week, which put an end to years of political stability, this prediction may well become a reality. 

But politics alone cannot uproot markets. According to Hulsman, along with India, Indonesia, South Africa and Brazil, Turkey is one of the ‘Fragile Five’ – the major emerging market economies reliant on foreign capital. With quantitative easing tapered and US interest rates likely to rise, the Fragile Five are now under threat, he explains.

“As I sensed in December, the Turkish water buffalo has run into real trouble; don’t be surprised if the market lion pounces over the next few months,” Hulsman concludes. 

City AM opinion

Troubling outlookCiting a report from the Institute of Internal Finance (IIF) on Monday, CNBC’s Ansuya Harjana also warns of trouble ahead. 

“We think the weakest emerging markets are likely to continue to suffer from pretty large outflows both on the debt side and equity side,” Jean-Charles Sambor, Asia Pacific Director at the IIF, told Harjana. 

However, while China suffered the greatest blow last week, Sambor believes Asian economies will come out relatively unscathed. “Of course there are a couple of countries which we’re still concerned [about],” he said. “We think Indonesia could be under quite a lot of pressure, but overall Asia is better positioned than other emerging markets, when and if, the Fed tightens.”
CNBC piece

Seen a blog, news story or discussion online that you think might interest CISI members? Email joanna.lewin@wardour.co.uk

Published: 19 Jun 2015
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