With the US dollar heading higher in May, investors redeemed $6.3 billion from emerging market (EM) funds, with bond funds accounting for nearly two-thirds of withdrawals.
Data from the Institute of International Finance (IIF) showed that global fund investor allocations to EM bonds have dropped to less than 11.5%, recording lowest the level in 2018.
EM investors favoured local currency bond funds through 2017 amidst a weaker greenback, with Indonesia, Colombia, Russia and Czech Republic as the favourites among foreign investors.
However, the weaker dollar story has reversed in recent months. The Turkish lira has tumbled nearly 20% versus the dollar in 2018, while the Argentine peso has fallen by 25%.
According to IIF, investors stopped being selective between vulnerable and insulated EMs in May, with bond funds exposed to every EM country suffering from outflows led by Thailand, Taiwan and the UAE.
What’s more, EMs saw net non-fund, non-resident portfolio outflows as well, which totalled $12.3 billion in May, with an even split between bond and equity markets. Asia was the biggest regional loser, recording $8 billion in outflows.
‘While idiosyncratic country risks and rising trade tensions have been a factor, higher global rates and the stronger dollar appear to be the dominant drivers of late—underscoring contagion risk,’ IIF analysts Celso Nozemo, Fiona Nguyen, Sonja Gibbs and Emre Tiftik said in report.
Domestic issues also continue with funding pressures in Argentina and Turkey. Both countries are suffering from significant budget deficits.
Last week, veteran investor Mohamed El-Erian, chief economic adviser of Allianz, tweeted that Brazil could be the next EM to face currency troubles.
After #Argentina / #Turkey , is #Brazil next in facing disruptive #FX #markets ?— Mohamed A. El-Erian (@elerianm) 6 June 2018
Recent #currency slide (chart) puts #CentralBank in quite a tricky position -- and there's little room for error as its response function is being monitored closely by domestic and foreign #investors pic.twitter.com/lGQCOQFLbN
In the first quarter of 2018, the Investec GSF Emerging Mkts LC Dyn Debt A Acc USD saw the highest net outflows within EM bond funds registered for sale in Singapore and Hong Kong, registering $391.8 million in net redemptions, data from Citywire Discovery revealed.
In the EM equity universe, the Robeco QI Emerging Conservative Equities D EUR fund saw the highest net outflows of $139.9 million.