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17 June 2013

Emerging markets see fund outflow amid gloom

Brazil and Egypt hit hard as US relooks money-printing programme

Source: Straits Times | Money 
By Jonathan Kwok

EMERGING market stocks from Brazil to Egypt have not been able to escape the recent global gloom, sinking nearly 10 per cent after the United States Federal Reserve last month hinted at slowing down its money-printing programme.

This tumble in the MSCI Emerging Markets Index - a broad stock index tracking the performance of 21 emerging markets such as China and Brazil - since May 22 has also been exacerbated by some nations' political risk. This has been most apparent in the case of Turkey, which has been mired in civil unrest.

Since the start of the year, emerging market equities have lost 9.6 per cent.

This downtrend marks a strong reversal from the pattern over the past two years, which had seen growth markets, including those in Asia, rise significantly on inflows of "hot" money.

Near-zero interest rates in developed countries like the US have come alongside massive money-printing programmes, and large investors from there have gone further and further abroad to grow their cash.

Now, after Fed chairman Ben Bernanke's May 22 comments that the money-printing may slow down, the cash has been quickly flowing out of developing markets.

Citi Investment Research strategist Markus Rosgen noted that emerging market equity funds saw US$5.8 billion (S$7.3 billion) of outflow in the past week.

And there was US$2.1 billion of outflow from Asia.

That beat the previous week's US$1.8 billion to become the single largest week of outflow since August 2011, when the euro zone crisis and downgrade of US sovereign debt similarly hammered global markets.

Barclays Research said this month that it suspects there has been a "correction (upwards) in risk premiums that, if sustained, may put pressure on emerging market assets".

"We remain cautious, waiting for more clarity from global data on the firmness of this rise in risk premiums," it added.

The risk premium essentially indicates the amount of returns that investors expect from an asset, to undertake the risk of owning it.

The past few years of abundant liquidity have depressed risk premiums, meaning global investors have been increasingly willing to pour money into emerging market instruments providing lower and lower rates of return.

A reversal of this trend, or an increase in risk premiums, would lead to a sell-off of emerging market assets.

Analysts say that the hot money in some emerging markets could also have made them over-valued, thus making them more vulnerable to corrections.

Markets hit recently include Turkey, where the local bourse has dropped 14.1 per cent since May 22.

The larger factor has been the domestic unrest, which has struck fear in the hearts of investors.

Turkey is still up for the year, by 2.3 per cent, but the same cannot be said for the Egyptian bourse, which is down 14.8 per cent since Jan 1. Egypt has lost 14.1 per cent since May 22.

Latin America's hardest hit markets include Brazil, down 12.6 per cent since May 22 and in the red by 19.1 per cent from the start of the year.

Mexico has lost 2.1 per cent since Mr Bernanke's comments and is down 10.2 per cent year to date.

In Asia, Shanghai has lost 4.7 per cent since Jan 1, with concerns over the Chinese economy especially impacting sentiment.

"Lacklustre statistics in China have painted a bleak picture that puts the sustainability of the country's growth in question," said a note by Maybank Kim Eng Research last week.

"Our regional economist, P.K. Basu, stresses that overcapacity continues to be a striking impediment for China and that more private consumption than public investment needs to be seen before markets can get more comfort over China's growth outlook."

South-east Asian markets are generally holding up better, with Malaysian shares up 4.3 per cent for the year and Indonesia ahead by 10.3 per cent.

Singapore, which is not considered an emerging market, is down 0.2 per cent for 2013. The benchmark Straits Times Index was flying high until May 22.

Since then, it has lost 8.5 per cent to take it into negative territory for the year.