Emerging Markets Stutter
There was a real emerging market stutter last week as we saw large outflows from these markets.
Investors pulled just over $9 billion from emerging-market funds and this is largest withdrawal rate seen since the financial crisis of 2008.
It may all feel a little like 2013 which was when the Federal Reserve warned it would end its quantitative easing bond-buying program. Emerging markets suffered a massive outflow then of funds back into US and other government bonds in what’s now known as the “taper tantrum.”
Some commentators are suggesting that we could be about to experience the same again with expectations that the Fed will shortly begin to raise US interest rates.
However, upon closer inspection we would suggest that this is not the only factor at play and that things may not be quite so difficult in emerging markets as it may first appear.
We should look at the other factors in play before just writing last week off as a precursor to a taper tantrum.
The majority of last week’s outflows comprising around 70% came from China.
That’s most likely due to the global-index compiler MSCI’s decision not to include Chinese shares in its benchmark index last week.
Billions of passive fund capital would have been “forced” to buy Chinese shares if they had been included, according to the Financial Times. As this did not happen the money positioned to do so flowed back out of the region.
Another important factor was the jump in bond yields in developed markets, particularly the German bund, this week.
Earlier in the year, the German 10-year bund had hit an extreme low and has been on the rebound ever since. 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.
But as that trend begins to reverse, and investors begin to cash out the liquidity moves back into cash, in this case euros.
The World Bank
Also earlier this week, the World Bank downgraded its 2015 growth outlook for global markets, including emerging markets. It warned that emerging markets, which had helped drive global recovery for years following the financial crisis, are now facing a “structural slowdown.”
Whenever there is a downgrade by an organisation such as World Bank, the International Monetary Fund, or the Organisation for Economic Co-operation and Development (OECD) there tend to be regional outflows, at least in the short term.
The Strength of the Dollar
Lastly, as our CIO, Peter Lowman, has being saying for some time, currencies are playing a major part in the volatility and outflows being seen in world regions but particularly those with a close peg to the dollar such as emerging markets.
The strong US dollar is essentially leading to a depreciation of emerging-market currencies.
Emerging market investors, in effect, experience a loss of capital because the currency they’ve invested in is worth considerably less. And in order to maintain their purchasing power, they have to sell some assets which will almost always be equities and bonds.
Whilst all currencies are struggling against a stronger dollar the emerging market economies find it particularly difficult.
To summarise, whilst it was a very tough week for emerging markets with lots of outflows all leading to what I have termed an emerging markets stutter but it was also a combination of several factors all at once which combined to make things appear a little worse than may actually be the case. As ever, our strategies are cognisant of these factors and adjustments are being made constantly to factor these in. However, we remain committed to the region as an area for investment over the medium to long term as part of client investment strategies.
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Lee Robertson, CEO
Lee is a Chartered Wealth Manager and is listed in the definitive Spears Wealth Management Index as one of the UK’s top 10 wealth managers. He is a regular contributor to the financial press and is often on television discussing wealth management and investment issues.
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