The View | Four reasons emerging markets won’t see panic this summer, like they did in 2013
‘Despite the hawkish tone from the Fed and the European Central Bank, some of the most actively traded assets in emerging markets remain resilient’
The spillover effects are already apparent.
The flurry of hawkish commentary from leading central banks in advanced economies is undermining investor sentiment towards emerging markets, the asset class that has benefited the most from the ultra-low – and in many cases negative – bond yields in developed countries.
In the week ending July 5, emerging market bond funds suffered net outflows for the first time this year, according to data from JPMorgan, with foreign investors withdrawing US$70 million compared with inflows of US$1.8 billion in the week ending June 28. Emerging market equity funds were hit hard too, with inflows tumbling to US$438 million, down from US$2.5 billion the previous week.
The prospect of tighter monetary policy in advanced economies has also put emerging market stocks under strain. The MSCI Emerging Market Index, a leading gauge of equities in developing nations, is down 1.8 per cent since June 26.
More worryingly, exchange-traded funds (ETFs), popular investment vehicles which track an index and which have become an increasingly important source of inflows into emerging markets, experienced outflows last week for the first time this year.
All of a sudden, there is talk of another “taper tantrum”, the dramatic sell-off in the summer of 2013 following the unexpected decision by the US Federal Reserve to begin scaling back its programme of quantitative easing (QE). Then, it was emerging markets which bore the brunt of the deterioration in sentiment, with bond and equity funds in developing economies suffering huge outflows in the second-half of 2013.