Bloomberg News

Emerging Markets Crack as $3.9 Trillion Funds Unwind: Currencies

June 20, 2013

Emerging Stocks Fall Most in 20 Months as Currencies Sink on Fed

A bronze bull statue stands at the entrance to the Bombay Stock Exchange (BSE) in Mumbai, India, on June 18, 2013. Photographer: Adeel Halim/Bloomberg

Investors are pulling money from emerging markets at the fastest pace in two years as slowing economic growth and the prospect of less global stimulus sink stocks, bonds and currencies from India to Brazil.

More than $19 billion left funds investing in developing-nation assets in the three weeks to June 12, the most since 2011, according to EPFR Global. Foreign investors dumped an unprecedented $5.6 billion of Brazilian stocks and $3.2 billion of Indian bonds this month, exchange data show. JPMorgan Chase & Co.’s emerging-currency index is down 1.4 percent this quarter, while the rupee and Turkish lira hit record lows and the real reached its weakest level since 2009.

“These are pre-quake tremors: something big is coming,” Stephen Jen, the co-founder of hedge fund SLJ Macro Partners LLP, said in a phone interview from London on June 12. “There’s tremendous deceleration in emerging markets. You may see crisis-like price actions without having a crisis.”

The reversal of the $3.9 trillion of cash that flowed into emerging markets the past four years has been compounded by popular protests in Turkey and Brazil challenging government policies on everything from fighting inflation to developing infrastructure. China, the largest developing economy, is forecast by the World Bank to expand at the slowest pace since 1999 this year, while current-account deficits in Indonesia, Brazil and Chile have grown to the widest in a decade.

Cheap Money

Speculation that the Federal Reserve and European Central Bank will end the flood of cheap money is contributing to the pullout. Fed Chairman Ben S. Bernanke said yesterday that policy makers may “moderate” their pace of bond purchases later this year, reducing money being pumped into the U.S. economy, some of which has found its way to other countries.

India’s rupee weakened as much as 2.2 percent against the dollar today to a record 59.98, and was at 59.575 as of 7:47 a.m. in New York. Raghuram Rajan, the chief economic advisor to India’s finance ministry, said in New Delhi today that the Asian nation will take “appropriate” steps to contain the rupee’s volatility.

Malaysia’s ringgit depreciated 1.7 percent, the biggest drop since November 2011. The Russian ruble declined 1.9 percent to an 11-month low and South Africa’s rand fell 2.9 percent, approaching the weakest level in four years. Poland’s zloty sank as much as 2 percent versus the euro to the lowest in a year.

MSCI Inc.’s Emerging Markets stock index is down 13 percent this year, compared with a 14 percent advance in the Standard & Poor’s 500 Index. The developing-nation measure is trailing the U.S. benchmark by the most since 1998.

Leading Declines

Brazil’s IBovespa (IBOV) led declines among 21 developing-nation stock indexes tracked by Bloomberg, with a 21 percent drop this year. Peru’s Lima General Index fell 20 percent and the Hang Seng China Enterprises Index sank 19 percent. The Philippine Stock Exchange Index (PCOMP) posted the biggest gain at 8.9 percent.

OGX Petroleo & Gas Participacoes SA, the Brazilian explorer controlled by billionaire Eike Batista, slipped 82 percent this year, the steepest drop in the MSCI Emerging Markets gauge. Sao Paulo-based utility Eletropaulo Metropolitana SA retreated 61 percent and China Foods Ltd., a Hong Kong beverage maker, dropped 58 percent, data compiled by Bloomberg show.

Local-currency government bonds in emerging countries have slumped 4.8 percent since Dec. 31, data compiled by JPMorgan show. Commodities, as measured by the S&P GSCI Index (SPGSCI), dropped 3.3 percent in the same period as demand from China waned.

‘Substantial Inflows’

After years of “substantial inflows,” emerging markets are “vulnerable” to “global portfolio relocations,” Deutsche Bank AG analysts led by Marc Balston in London wrote in a client note on June 13.

ECB President Mario Draghi said June 6 that the central bank sees no reason for “immediate action” on asset purchases or further cuts to its 0.5 percent main interest rate.

Speculation that developed-world interest rates have bottomed out is reducing appetite for the carry trade, where investors borrow cheaply in one country to invest in higher-yielding currencies, often in emerging markets.

The rand in South Africa, where the benchmark rate is 5 percent, is down 21 percent this year against the dollar, the biggest decline among emerging currencies, and lost 14 percent since May 1 alone, data compiled by Bloomberg show. The Brazilian real retreated 11 percent since the start of last month, while the rupee sank 11 percent.

Deutsche Bank, the biggest currency trader, recommends selling Asian currencies, including the yuan, rupiah and ringgit. China’s yuan has lost 0.1 percent since reaching a record high of 6.1203 per dollar last month.

Underweight Call

JPMorgan advised its clients last week to stay underweight all emerging-market assets, citing capital outflows and a “negative momentum” in expectations for growth.

“Developed-market investors have been heavily favoring emerging-market bonds and equities in recent years” because their economies were expanding rapidly and their assets were “systematically cheap,” JPMorgan strategists led by Jan Loeys in New York wrote in a June 14 note. “They are now starting to wonder whether this is still the case, and are slowly moving to neutral on emerging markets.”

The World Bank lowered its forecast this month for China’s growth in 2013 to 7.7 percent, which would be the slowest since 1999, from an 8.4 percent estimate in January. The Washington-based institution cut its forecast for developing-nation growth this year to 5.1 percent, from 5.5 percent. That’s still more than quadruple the 1.2 percent forecast for advanced economies.

Bigger Gain

Even with the recent declines, the MSCI emerging-market stock index has advanced 222 percent since the end of 2002, compared with an 85 percent increase in the S&P.

JPMorgan’s currency gauge has returned 103 percent in the same period, and emerging currencies make up three of the five top performers in the global exchange market. The real is up 59 percent since the end of 2002.

Viktor Szabo, who helps oversee $12 billion in emerging-market assets at Aberdeen Investment Management Ltd., said the selloff has made some emerging-market currencies attractive. The real is worth buying because bond yields have risen to a level that compensates for the risk, he said.

Yields Jump

The average yield on emerging-market government bonds jumped to 6.25 percent on June 11, the highest in a year, before falling to 6.19 percent, JPMorgan indexes show. Brazil’s benchmark 10-year note yield rose to 11.5 percent, from 9.2 percent at the start of the year, according to data compiled by Bloomberg.

“We’ll see continued appreciation of emerging-market currencies” should volatility decrease, Szabo said in a June 14 phone interview from London. “Looking ahead, we’re still positive on China, the U.S. and Japan. We don’t expect a further drag on emerging markets.”

Anti-government protests, sparked by anger over a planned development in Istanbul, spread nationwide in Turkey on May 31, marking the most serious unrest during Prime Minister Recep Tayyip Erdogan’s decade in power. At least four people have died in clashes between demonstrators and police, and thousands have been injured.

In Brazil, protests erupted over an increase in bus fares and have spread across the country in the biggest demonstrations in the South American country in two decades.

The real fell to as low as 2.2354 per dollar today, its weakest level since April 2009, while the Turkish lira slipped to a record 1.9315.

Outstripping Crisis

In the four years through 2012, investors poured $3.9 trillion into emerging markets, outstripping the $3.1 trillion they added in the same period leading up to the global financial crisis, said SLJ Macro’s Jen, citing data from Institute for International Finance Inc.

In another sign international investor appetite is waning, South Korea raised less than a 10th of the amount planned in an auction of inflation-linked bonds today. The Finance Ministry sold 55.6 billion won ($49 million) of 10-year linkers, having offered 600 billion won, according to its website.

Losses in emerging-market currencies in coming months may approach the declines of 2008 when the real and lira slid more than 23 percent, according to Jen, a former International Monetary Fund economist who first warned about developing nations as early as January 2011.

‘Dangerous’ Times

“This is a dangerous period,” Jen said. “The Fed will start to normalize rates. It’s a gradual process, but the pressure will only point in one direction, which is in favor of the dollar and against emerging markets.”

The $14 billion Pimco Emerging Local Bond Fund (PELBX:US), the largest developing-country debt fund, lost $69 million in May in its second monthly outflow since 2009, according to Morningstar Inc. (MORN:US) data. Mark Porterfield, a spokesman for Newport Beach, California-based Pacific Investment Management Co. LLC, declined to comment.

The selloff will probably “constitute only a small part of a bigger trend for emerging assets” as countries fueled by cheap credit are “wrong-footed” in an environment of rising interest rates, Goldman Sachs strategists led by London-based Thomas Stolper wrote in a June 14 note. The lira, real, rand, Thai baht and Philippine peso are the most vulnerable, the analysts wrote.

Budget Gaps

Imports fueled by cheap borrowing increased the current-account deficits of Chile, Brazil and Indonesia to the highest in at least a decade, leaving the countries susceptible to capital flight, data compiled by Bloomberg show. South Africa needs to attract $63 billion of foreign capital every month to sustain its consumption.

International investors have less incentive to provide that cash while rates at home are rising. The yield on the benchmark 10-year U.S. Treasury (USGG10YR) note jumped to 2.47 percent, the highest since August 2011.

The declines in emerging-market assets may accelerate outflows and create a vicious cycle, according to Phillip Blackwood, who oversees $3.7 billion of developing-nation debt as managing partner at EM Quest Capital LLP in London.

“This is the beginning of the end of the easy money,” said Blackwood, who’s betting on a retreat in the lira and Colombian peso. “The positive situation they were in before is now reversing. That’s a perfect storm for further drops.”

To contact the reporters on this story: Ye Xie in New York at; Michael Patterson in Hong Kong at

To contact the editor responsible for this story: Laura Zelenko at

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Companies Mentioned

    (PIMCO Emerging Local Bond Fund)
    • $8.36 USD
    • 0.02
    • 0.24%
  • MORN
    (Morningstar Inc)
    • $64.9 USD
    • -0.36
    • -0.55%
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