TRADERS dumped exchange-traded funds (ETFs) tracking emerging market (EM) stocks at the fastest pace in over a year last quarter amid concerns over the slowdown in China, a selloff in commodities and the prospect of higher interest rates in the US.
Investors pulled US$6.1 billion from US-traded ETFs that offer exposure to a basket of developing-nation equities in the three months through September, the most since the first quarter of 2014, according to data compiled by Bloomberg.
Exchange-traded funds that invest in both emerging-market stocks and debt as well as individual countries saw outflows in 12 out of 13 weeks ending Sept 25, with losses totalling US$12 billion, the data shows.
The withdrawals came amid mounting evidence of slowing Chinese economic growth and as the Federal Reserve moved closer to an increase in the near-zero US rates that have supported demand for riskier assets in developing nations. The concerns have roiled emerging markets from Colombia to Kazakhstan and spurred a deepening of the rout in commodities, further dimming sentiment towards countries like Russia and Brazil.
"When you have all the headwinds emerging markets are facing, it really takes investors with a strong stomach to try to put money to work there," David Mazza, head of ETF research at State Street Global Advisers, said by phone in New York. "Emerging markets are universally hated, and investors continue to not find a catalyst for a reversal in performance."
The ETF withdrawals mirror broader emerging-market outflows during the period. Investors have pulled US$40 billion from developing economy stock and bond funds in the third quarter, fleeing emerging markets at the fastest pace since the height of the global financial crisis in 2008, according to the Institute of International Finance.
The redemptions intensified after China's equity boom turned to bust as mainland shares plunged from their June record and the government took unprecedented measures to shore up stocks, including banning major shareholders from selling and curbing index futures trading. The Shanghai Composite Index fell 29 per cent in the third quarter, the most since 2008.
Stocks in Brazil slid to a six-year low in the third quarter on concern that the country, which Standard & Poor's downgraded to junk in September, will struggle to recover from the worst recession since the 1930s amid a political stalemate and a corruption investigation.
Mohit Bajaj, director of ETF trading solutions at WallachBeth Capital, says the selloff has gone too far as the biggest risks associated with developing markets have already been priced in.
"Some funds in the emerging markets are oversold," Mr Bajaj said by phone in New York on Wednesday. "Eventually it will level off, and at some point that will stabilise and we'll see more inflows back into the funds."
Vanguard's US$39 billion FTSE Emerging Markets ETF, the biggest fund tracking developing-nation stocks, has retreated 19 per cent last quarter to the lowest level since 2009. The funds had outflows of US$3.4 billion in the past three months.
Emerging market ETFs have lost 16 per cent this year on average, compared with a 5 per cent drop in the last three years. Investors pulled money from developing nations in two out of three quarters in 2015, withdrawing a total of US$6 billion from developing nation funds so far in 2015. That's equal to about 6 per cent of the funds' total market capitalisation, the biggest retreat as a percentage of aggregate market capitalisation in at least 10 years, data compiled by Bloomberg shows.
The MSCI Emerging-Markets Index slid 19 per cent last quarter to its lowest closing level in six years as historical volatility, a measure of price swings, reached the highest since 2011. This compares with a 6.9 per cent loss in the Standard and Poor's 500 Index and a 8.9 per cent decline in the MSCI World Index, which tracks developed-market stocks.
"If there are other opportunities out there, investors are likely not going to be willing to step into emerging markets," State Street's Mr Mazza said. "There's still a need for a further shakeout in emerging markets, and that might be the catalyst for investors who can't give up on opportunities out there, but right now we're not seeing it." Bloomberg