Investors are abandoning emerging market funds due to fears of a slowdown


March 25 (Reuters) – Mutual funds that invest in emerging market (EM) stocks and bonds have faced huge outflows over the past month as the Russian crisis intensifies. -Ukrainian raises fears of rising inflation and slowing economic growth in these markets.

According to Refinitiv Lipper, a cumulative $8.1 billion has flowed out of emerging market equity funds and $5.73 billion out of bond funds over the past four weeks.

This contrasts with strong inflows last year, when emerging market bond funds received $232 billion, while emerging market equity funds got $103.4 billion.

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Fund flows: emerging market stocks and bonds

Among emerging markets 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 countries face higher input costs as commodity prices soar due to escalating conflict between Russia and Ukraine. Both countries are major exporters of a variety of commodities such as crude oil, gas, wheat and nickel.

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

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

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

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

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

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 money to pay their bills. imports.

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

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Inflation has increased in many emerging countries due to soaring commodity prices, which prompted some central banks to raise interest rates this year.

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The National Bank of Hungary raised its benchmark rate by 100 basis points to 4.4% 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 hamper activity and while we expect price pressures to ease in the coming months, the substantial interest rate hikes over the past year will weigh more and more about growth,” Schroders strategist Keith Wade said in a note this month.

MSCI World vs. MSCI EM

“An important factor will be investors’ appetite for emerging markets. This asset class has always promised but hasn’t always delivered,” said Jerry Orosco, portfolio manager at Florida-based Intercontinental Wealth Advisors. .

The MSCI EM Index (.dMIEF00000PUS) is up just 7.7% over the past 10 years, compared to 130.9% for the MSCI World Index (.MIWD00000PUS).

“Emerging market equities have underperformed year to date and over 1, 3, 5 and 10 years. Impatient investors may favor the US as a more stable market offering better long and short term.”

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Reporting by Patturaja Murugaboopathy Editing by Vidya Ranganathan and Nick Zieminski

Our standards: The Thomson Reuters Trust Principles.


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