Emerging market fund flows have suffered their worst week since 2011, as investors fear a correction arising from the tapering of the U.S.’s Quantitative Easing program.

emerging market funds

During the week ending June 12, there were net redemptions of US$6.4bn in EM. Redemptions are four times 12 month average. Total net redemption in the last three weeks came in at US$15bn. YTD the flows were US$14bn (27.1% of total EM flows in  2012).

The table below shows market data & net foreign investment,  June 6 – 12, 2013:

Market data & net foreign investment chart

The net flows by mandate were:

  • Total EM equity funds US$6.4billion redemptions. (US$4.7billion redemptions in ETF-s)
  • GEMS equity funds US$3.6billion redemptions.
  • Asia ex-Japan equity funds US$2.1billion redemptions.
  • EMEA equity funds US$504million redemptions.
  • LatAm equity funds US$142million redemptions.
  • US equity funds US$1.0billion redemptions.

Outflows from all emerging markets:

  • Indonesia has witnessed highest weekly outflow since 2001
  • Korea: US$1992million outflows
  • Brazil: US$1774million outflows
  • Indonesia: US$931million outflows
  • Thailand: US$696million outflows

Reasons For Emerging Market Bond Flows

Underperformance of Emerging Market equities chart

There are a host of reasons behind the sharp downturn in emerging markets, said James Gruber, a contributor to Forbes Asia

1) Fears over the U.S. cutting back QE. Much of the money printed since 2009 has leaked into areas offering growth, particularly emerging markets. If the speculation about so-called QE tapering is right, that supply of printed money could soon dry up.

2) Concerns over rising bond yields. Talk of QE tapering has lifted U.S. bond yields and has put upward pressure on emerging market bond yields as a consequence.

3) Continued weakness in commodity prices. That weakness of course impacts commodity-producing nations such as Brazil, Mexico, South Africa and Indonesia. For instance, sugar prices have declined close to 30 percent since last July, which has an obvious effect on the world’s largest sugar producer, Brazil. The rout in gold prices has impacted South Africa, though that region has a host of other economic issues it’s also dealing with.

4) Weakness in other previously strong growth markets. Notably China, where GDP growth has slowed from the 11 percent of the past decade to under 8 percent as a credit bubble unravels. Also India, where economic growth is the slowest in a decade as investment slows while inflation remains a risk, thereby limiting scope for further rate easing.

5) Perceptions of increased political risks haven’t helped. We’re primarily referring to Turkey, where there’ve been major protests against the government’s authoritarian ways and attempts to impose Islamic conservative values on a secular state.