Investors pull back from emerging market fundsHigh quality global journalism requires investment. Emerging market funds have suffered the worst run of redemptions since at least 2004 over the past week, the latest evidence of investor unease over riskier financial markets.Almost $6bn was pulled out of emerging market funds in the five days to Wednesday, according to EPFR Global, a fund flow data provider. Equity funds have seen strong outflows for some time, but fixed income funds are now also experiencing substantial withdrawals. Overall, fixed income redemptions were $3.2bn, or 62 per cent higher than the previous record week of outflows in October 2008, following the collapse of Lehman Brothers, when $2bn was withdrawn.“We haven’t lost much, but industry redemptions have been massive overall, and there’s been a lot of forced selling over the past week,” said Esther Chan, fixed income portfolio manager at Aberdeen Asset Management.The MSCI Emerging Markets index of shares has dropped for five consecutive months, but sovereign and corporate bonds – both denominated in local and “hard” international currencies – had proved more resilient until recently.The JPMorgan EMBI Global Diversified index of sovereign and corporate bond yields for emerging markets jumped to a one-year high of more than 6.3 per cent this week, up from 5.58 per cent at the start of September.Local currency bond funds have been badly hit by redemptions. After posting 25 straight weeks of inflows, investors have withdrawn money for the past two weeks, and almost $1.7bn in the past week.“Local currency debt is exposed both on the foreign exchange rate and interest rates, and currencies dropping so quickly has shell-shocked investors who thought it was a one-way bet,” Ms Chan said.All 25 of the largest emerging market currencies dipped against the US dollar in September, many by double digits.The Brazilian real has shed 14.3 per cent against the dollar, the South African rand 13.1 per cent and the Russian rouble 10.6 per cent.“As a result, the year-to-date performance of EM local currency bond indices turned from near double digit positive to negative within a few weeks,” analysts at Royal Bank of Scotland said in a note. “With global macro uncertainty staying high we think investors are unlikely to see the ... sell-off as an opportunity to buy.”The marked shift towards a “risk-off” investor strategy was also reflected in $5.4bn outflows from developed market equity funds and $1.1bn withdrawals from high yield bond flows.Meanwhile, safer asset classes such as developed market bond funds and money market funds saw inflows of $7.5bn and $8.9bn respectively, according to EPFR.“People still like the fundamental emerging markets story, but right now people are afraid,” Ms Chan said. “But investors will remember how sharp the rebound was after 2008, so the outflows could reverse very quickly.”
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