MacroscopeDespite the emerging market stock rout, Europe has fund managers more concerned

Nicholas Spiro says while the slide in Asian tech stocks heightens concerns over emerging market equities, uncertainties in Europe pose a bigger worry

Britain remains the most disliked by equity investors, while Italy’s spat with the euro zone and the end of the Merkel and Draghi era are also causing disquiet

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Anti-Brexit campaigners protest outside Parliament in London on October 17 before British Prime Theresa May’s meeting with European Union leaders in Brussels to discuss a possible Brexit deal. Photo: EPA-EFE

Published: 4:00pm, 15 Nov 2018Updated: 10:35pm, 15 Nov 2018

Another week, another sign of the vulnerability of emerging market equities. On Tuesday, Asian technology stocks came under further strain in response to the sharp decline in the shares of Apple as investors become increasingly concerned that demand for the company’s iPhones has peaked. With the tech sector accounting for 27 per cent of the market capitalisation of the benchmark MSCI Emerging Markets Index, “tech-centric fear” in US stocks, as Bloomberg puts it, is giving investors another reason to remain bearish on developing economies.

Yet, while emerging market shares have taken a pounding this year, global fund managers are much more gloomy about the prospects for Europe.

According to JPMorgan, which publishes data on fund flows every week based on figures from EPFR Global, a fund-tracker, emerging market equity funds have attracted net inflows of US$13.5 billion so far this year. This compares with net outflows from European – which includes British – equity funds of more than US$26 billion. Even US stock funds, which have had to cope with an increasingly volatile American equity market, have attracted inflows, with investors adding US$3.5 billion of new money this year.

While emerging markets are facing major problems, these are well known and have been priced in, excessively so in the case of equities. The risks in Europe, on the other hand, are more difficult for investors to grasp and could yet become systemic.

The two big storm clouds hanging over European markets are the raging battle over the terms of Britain’s impending departure from the European Union and the refusal of Italy’s new populist government to abide by the fiscal rules underpinning the euro. Both of these stand-offs have taken their toll on European stocks.