Emerging market equities and fixed income assets saw net outflows for the first time since March, according to data from the Institute of International Finance, which tracks flows from non-resident investors.
Tightening monetary policy in developed markets should be negative for flows into emerging markets. The Federal Reserve and European Central Bank are moving slowly to raise rates and wind down their quantitative easing programmes, ending the supply of cheap money that has buoyed investment in EM.
EM equities have been on a sustained bull run for much of this year, and, analysts said that this turnaround is likely to be short-lived.
Robert Samson, senior portfolio manager in the multi-asset team at Nikko Asset Management said that ‘the correction for EMs is not a shift of fundamentals.’
‘EM inflation-adjusted bond yields are at very high levels while developed markets are still at very low levels. So from a valuation perspective, EM bonds look a lot more attractive. Secondly, fundamentals are improving in the EM region and balance sheet repair is happening in many of the countries that suffered in 2014-2016,’ Manu George, senior investment director, fixed income at Schroders said in an e-mail response.
‘One week of outflows is not enough to suggest that the dynamic of strong demand for EMD, seen during 2017, is at risk of reversing,’ said Stuart RitsonStuart Ritson, head of Asian rates and FX at Aviva Investors.
On Wednesday, US Federal Reserve chair Janet Yellen said in a testimony to Congress that the central bank would increase rates very slowly, over a long time horizon, pushing investors back into EM.