Saturday 1 February 2014

Investors pull $12bn from EM stock funds

By David Oakley, James Kynge and Thomas Hale

The four biggest global stock markets recorded sharp losses in January for the first time in four years, as weeks of turmoil in emerging markets spread to the developed world.

Stocks in the US, UK, Europe and Japan have not posted simultaneous declines for January since 2010 when the euro zone debt crisis was at its height, prompting investors to warn the inauspicious start did not bode well for the rest of the year. US central bank tapering and a slowing Chinese economy are likely to weigh heavily on sentiment.

The spreading gloom was prompted by a mass exodus from the emerging markets with investors pulling money out of the developing world at the fastest rate since 2011.

The biggest losers from the turmoil – most intense in the Turkish and South African currency markets – included big dedicated emerging market investment groups such as Franklin Templeton, First State and Ashmore. All three have suffered outflows and redemptions, according to investment managers.

Mark Mobius, Templeton’s top fund manager, refused to be rattled despite the hit to his portfolios, insisting the dive in some of the emerging markets offered opportunity rather than danger for his funds.

“We’re happiest when markets are down,” he said. “We want to take advantage of any declines in these markets.”

Others were less sanguine. “It has been a bloody week,” said a manager at an emerging market debt fund. “We can recover from one week. But if this goes on, then that will have big ramifications for our profit margins.”

The exodus from emerging markets has been led by retail investors, according to fund managers, while institutional groups, such as pension funds, have held their nerve and stuck to their positions.

“Retail investors are running for the exits. They see the turmoil, they read the newspapers and they have a shorter time horizon,” said Michael Ganske, head of Emerging Markets at Rogge Capital Partners, a fixed income fund with $59bn under management.”

“Whenever investors are panicking, that is a good buying opportunity,” he added.

The FTSE 100 finished down 3.5 per cent for January, the Eurofirst 300 was 1.9 per cent lower, the Nikkei 225 dropped 8.5 per cent and the S&P 500 fell 3.6 per cent over the month in New York.

Emerging market equity outflows rose to $6.3bn in the week up to January 29, the biggest weekly withdrawal since August 2011, with a total for the month hitting $12.2bn, according to data from EPFR Global, which tracks investment flows.

Emerging market bond funds also suffered, with $2.7bn in outflows over the past week and $4.6bn withdrawn so far this year.

However, there have been winners from the volatility. Some hedge funds such as Moore Capital have been shorting emerging markets while M&G Investments and Aberdeen Asset Management have also hedged positions in Turkey.

One emerging markets investor said: “A lot of funds saw this coming. Turkey has been an accident waiting to happen.”

http://www.ft.com/

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