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EM Outflows Just Getting Started: Societe Generale

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Emerging market outflows are picking up speed as investments get redirected to Europe, primarily Spain and the UK, and leading indicators suggest that cumulative outflows since early 2013 could triple in the coming months.

“Since cumulative inflows into Emering market equity funds reached a peak of $220bn in February last year, $60bn of funds have fled elsewhere,” writes Societe Generale analyst Alain Bokobza. “Given the exceptionally strong link between EM equity performance and flows, we think it plausible that funds are currently withdrawing double that from EM equity.”

EM markets with current account surpluses could benefit

The factors behind investors’ concern about EM markets are diverse, but the catalyst seems pretty clear. As the Fed continues with its plans to taper QE, Emering market economies that have benefited from cheap financing will face growing headwinds. Bokobza predicts that balance of payment issues will become more important in EM markets, which seems reasonable as investors who want to take advantage of the outflows and find cheap assets invest in countries less exposed to the effects of tapering. While the threat of contagion means the amount of risk investing in any Emering market asset has gone up, countries with current account surpluses are seen as less risky.

“We see no early end to EM asset de-rating. Furthermore, the Fed remains assertive on execution of tapering despite recent turmoil within the EM world, which spells more turbulence ahead,” Bokobza writes.

But even with a strong preference for global Emering market funds and global EM ETFs among investors (nearly half of global Emerging market Assets), the outflows don’t depend on regional differences or the level of exposure that you might expect, with Asia ex-Japan equities being the only segment still seeing net inflows.


combined EM bond regional indices 0214

combined EM equity regional indices 0214


Money being redirected to UK, Spain

Now that the US has already gone through most of its easy equity gains, the UK and Spain are the main beneficiaries of Emering market outflows, driving net inflows for the continent. Both countries are at the beginning of their recoveries. Spain, which was seen as one of the most troubled economies in Europe until recently, has been growing faster than analysts initially expected, while the UK has been rebounding thanks to a strong real estate market.

Europe equity inflows 0214

Spain equity inflows 0214

UK equity inflows 0214

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