Investors dump emerging market funds on slowdown concerns

Mutual funds that invest in emerging market (EM) stocks and bonds have faced huge outflows over the past month as the intensifying crisis between Russia and Ukraine sparks fears of higher inflation and slower economic growth in the US. these markets.

According to Refinitiv Lipper, a cumulative $8.1bn has flown out of emerging market equity funds and $5.73bn from bond funds in the past four weeks.

This contrasts with strong inflows last year, when EM bond funds took in $232bn, while EM equity funds took in $103.4bn.

Among emerging market equity funds, Emerging Markets Custom ESG Equity Index Fund E and Invesco Developing Markets Fund R6 led outflows, with net sales of $1.09 billion and $756 million, respectively.

Emerging market nations face higher input costs as commodity prices soar due to an escalation in the conflict between Russia and Ukraine. The two countries are major exporters of a variety of commodities, including crude oil, gas, wheat, and nickel.

According to data from Oxford Economics, China, India and South Korea are the largest importers of crude among emerging markets.

TD Securities estimates that a 50 percent increase in the average price of oil would result in an increase in Asia’s oil trade deficit of $240 billion this year.

“Rising energy prices and growing risk aversion due to the crisis in Ukraine are fueling risks of capital outflows from the region at a time when current account positions are worsening,” the brokerage said.

Brent crude was trading at $116.3 a barrel on Friday, having gained more than 51 percent so far this year.

Higher import costs are likely to hit economies with larger current account deficits, prompting more outflows from their bonds and stocks, analysts say.

Colombia, Chile and Egypt have the largest current account deficits as a percentage of their gross domestic product (GDP), according to data from Oxford Economics, making them more likely to borrow the money to pay for their imports.

China, Turkey, Poland and South Korea have the largest trade exposure to Russia among emerging countries, according to the data.

Inflation has risen in many emerging market countries due to rising commodity costs, prompting some central banks to raise interest rates this year.

The Hungarian National Bank raised its base rate by 100 basis points to 4.4 percent on Tuesday, the biggest rate hike since 2008, saying rising energy costs and the war in Ukraine had fueled risks. of inflation.

“High inflation continues to impede activity and while we expect price pressures to ease in the coming months, the substantial interest rate increases over the past year will increasingly weigh on growth,” said Keith Wade, strategist from Schroders, in a note this month.

β€œAn important factor will be investor appetite for emerging markets. This asset class always promised, but didn’t always deliver,” said Jerry Orosco, portfolio manager at Florida-based Intercontinental Wealth Advisors.

The MSCI EM Index has risen just 7.7% over the past 10 years, compared to a 130.9% rise for the MSCI World Index.

“Emerging market equities have underperformed year to date and for 1, 3, 5 and 10 years. Increasingly impatient investors could favor the US as a more stable market offering better long-term and short-term returns.

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MSCI World vs. MSCI EM https://tmsnrt.rs/3L6nZIH

Net imports of crude oil from emerging countries https://tmsnrt.rs/37USdQV

Emerging Countries Inflation Rates Emerging Countries Inflation Rates https://tmsnrt.rs/36EAHPV

Current account balance of emerging markets (percent of GDP) https://tmsnrt.rs/3rnz69d

Trade of emerging countries with Russia (in millions of $) https://tmsnrt.rs/36BCgOG

Fund Flows: Emerging Market Stocks and Bonds https://tmsnrt.rs/3L58px8

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(Reporting by Patturaja Murugaboopathy; Editing by Vidya Ranganathan and Nick Zieminski)

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