The tide turned last week and then the floodgates were swept away. Investors withdrew a massive $3.2bn from EM bond funds and $2.6bn from EM equity funds in the week to Wednesday according to EPFR, the fund watcher. It was the biggest weekly outflow from EM funds since EPFR began monitoring fund flows in January 2004.
No prizes for guessing why investors are losing their collective nerve. But the shift is seismic: until a fortnight ago, flows to EM local currency bond funds had been positive for 25 straight weeks, even as the eurozone crisis and fears over the global economy reached fever pitch. Then $464m went in a week; now another $1.68bn has gone – overturning the previous two months’ gains [CORRECTED - the previous version had year to date gains].
To give an idea of the scale: as Demetrios Efstathiou of RBS points out in note to clients on Friday, last week’s outflow from all EM bond funds was 62 per cent bigger than the previous biggest weekly outflow following the collapse of Lehman Brothers in 2008, of $1.97bn.
Efstathiou said the outlfows confirmed once again that “when global markets enter periods of extreme fear, EM investors shift funds to the safety of the USD and US Treasuries.”
While describing investors’ behaviour as “panic”, however, he wrote that outflows should abate as many revert to wait and see mode:
The market panic which started the previous week and the overall defensive stance of many PMs we talk to (many hedged their EM FX exposure / reduced duration), led to the huge EM currency sell-offs and the sharp steepening of bond curves. As a result, the YTD performance of EM local currency bond indices turned from near double digit positive to negative within a few weeks. With global macro uncertainty staying high we think investors are unlikely to see the EM FX/Bond sell-off as an opportunity to buy. We think outflows are likely to continue but moderate in magnitude until the global macro picture improves.
EPFR file, beyondbrics
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