Investors withdraw $3.7bn from emerging markets

Net redemptions from emerging market equity funds reached a five-week high in the latest week amid pressure from the rising dollar and uncertainty about trade policy in the US, especially with China.

Investors withdrew $3.7bn from emerging market equity funds in the week to Wednesday, according to EPFR Global, with Asia ex-Japan equity funds seeing net redemptions of $2.36bn, the largest since September of 2015. China equity funds recorded their biggest outflows since May at $667m.

“That seems consistent with investor uncertainty about emerging markets, especially Asia, when it comes to some of the rhetoric with regard to potential changes in trade policy let alone where we may see the dollar continue to move,” said David Mazza, head of ETF and mutual fund research at State Street Global Advisors. “It has an impact at the country and the company level for many of these emerging markets.”

Donald Trump’s transition team on Wednesday announced that it plans to create a National Trade Council inside the president-elect’s White House to oversee industrial policy and appointed Peter Navarro, a China hawk and one of the architects of the populist economic message, to run it. A Harvard-trained economist, Mr Navarro is the author of books including Death by China.

The dollar also is a source of strain for emerging markets.

“There is a lot of EM debt denominated in dollars,” said Nicholas Colas, chief market strategist at Convergex. “That works fine as long as currency markets are stable and not well at all when the dollar is strengthening. Because they have dollar-based debt, it puts a real crimp on balance sheets as the value of the debt basically explodes without any commensurate improvement in corporate fundamentals.”

Mr Colas said that as a byproduct of historically low US rates in recent years, companies in areas including China, Southeast Asia, Africa and Brazil, found cheap funding in dollars.

“It drove [yields on] developed market debt down so much that emerging market companies could issue 15-year paper at 4 and 5 per cent,” he said.

US equity funds snapped a six-week inflow streak since the US presidential election with $644m in outflows. That was consistent with sluggish activity in the equity market of late. The Dow Jones Industrial Average, for example, has hovered just below the psychological 20,000 level, but failed to pierce it.

Nearly $65bn has flowed into US equity funds since the election on hopes that Mr Trump’s agenda will fuel economic growth.

US bond funds were hit with a $3bn outflow, part of an ongoing trend of investors fleeing bonds on expectations that Mr Trump’s plans for tax cuts and infrastructure spending will drive rates higher.

Bond funds focused on Russia added $72m, their biggest intake since the third quarter of 2013, continuing capital flows seen last week on signs that Mr Trump will seek to thaw relations with Vladimir Putin.

Nearly $30bn left money market funds, but large outflows are typical seasonal as companies pay bonuses and individuals withdraw funds for holiday gifts.