A drop in the ocean or deluge to come?
Glass half full or half empty? For emerging markets watchers, it’s still not clear.
Last month was a record one in terms of net outflow for funds dedicated to emerging equities, Boston-based agency EPFR Global said. Debt funds meanwhile saw a $5.5 billion exodus in the week to June 26, the highest in history .
These sound like big numbers, but in fact they are relatively small. EM equity funds tracked by EPFR have now reversed all the bumper year-to-date inflow registered by end-May, but what of all the flows they have received in the preceding boom decade?
Estimates are of over $8 trillion in flows to the developing world since 2004. And Benoit Anne, head of EM strategy at Societe Generale, points out that during the years of Fed money printing alone, emerging markets received $4.2 trillion, according to the Institute for International Finance. So really, not much has come out in the recent selloff. Depending on how you look at it, that’s a cause for cheer (a lot of the recent inflows consist of “sticky” money and in for the long haul) or cause for gloom (there’s a lot more cash that could flee if sentiment gets worse) .
Outflows have been fairly small so far and they could actually get much larger in the period ahead. This is when I take a bird’s eye view and look at how much inflow has gone to EM over the past few years…..If we are talking about a major reversal of the global liquidity conditions in the period ahead, the impact in terms of inflows into EM will be substantial. …If one looks at specific markets from a bottom-up perspective, it is not clear to me that the pain has been inflicted.
He cites the example of Turkey where despite the recent shakeout, foreign investor participation is still near its all-time high.
If that’s the case, there is indeed room for more pain. Percival Stanion, head of Baring Asset Management’s multi-asset group has trimmed allocation to emerging markets. He reckons that heavy positioning and weakening economies are combining with rising political threats to pose risks to investments in the sector.
The recent selloff and the currency weakness are unfortunate developments. But if you get Egypt-type political turmoil spreading to a big EM country such as Turkey or Brazil, you need just one country to deteriorate significantly and it will lead to concerns about the whole asset class.
There’s one more possible source of outflows – citizens of emerging economies. Many residents and companies have accummulated vast amounts of wealth and often choose to park it overseas. An IIF report last week noted a surge in private sector outflows from a number of developing countries, including China, a trend that could be exacerbated by the poorer outlook at home. The IIF predicts that outward investments and lending by the EM private sector could reach $1 trillion this year, or 10 times more than a decade ago.