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.”

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Sri Lanka bank, finance firm consolidation in progress: Central Bank

Jan 31, 2014 (LBO) - Sri Lanka's banks and non-bank firm consolidation was progressing with meeting with individual firms with the regulator with preliminary plans expected to be submitted by March 31.

The Central Bank said it was also in talks with consultancy firms to get valuation and other services for planned mergers.

Sri Lanka's central bank is trying to shrink the total number of banks and finance firms in the country which will make them larger and easier to regulate.

Following two balance of payments crises in rapid succession in 2008 and 2011, non-bank lenders in particular, that play in the sub-prime market have run into bad loans and capital deficiencies.

Banks usually run into trouble in any country following credit bubbles generated by prolonged periods of low interest rates.

Analysts say while credit cycles, and bank collapses can happens even in the absence of central banks, such as in free banking regimes.

But bubbles and bad loans with central banking have been greater as low interest rates persist for longer periods than in free banking allowing bigger bubbles to be blown, speculative activity and more severe mal-investment to take place.

The two most recent global credit bubble collapses and banking panics in the 1930s (Great Depression) and 2009 (Great Recession) was bigger in scale impact for example than the 1871/72 railway bubble collapse which happened before the US Fed was created.

The full statement from the regulator is reproduced below:-

Satisfactory progress being made on Consolidation effort

As already set out in the Road Map 2014 and beyond, the Central Bank conducted a seminar on 17 January 2014 to explain the need and the rationale for the Consolidation in the banking and non-banking financial institutions (NBFIs) beginning 2014. At such seminar, the key components of the Consolidation Plan were announced to the Chairmen and Chief Executive Officers of banks and non-bank financial institutions (NBFIs), key management of the audit firms which are eligible to audit banks and NBFIs, and representatives of the Institute of Chartered Accountants of Sri Lanka and the Institute of Personnel Management.

Subsequently, the Central Bank senior management held one-on-one meetings with almost all boards of directors and senior management of the local banks and NBFIs, at which the expectations of the Consolidation process was further clarified and specific issues pertaining to particular institutions were discussed in detail.

The Central Bank also informed the banks and NBFIs to approach the Consolidation process in a professional manner by seeking specialised IT, Legal, Tax and HR services in order to ensure the objectivity and integrity of the process.


In addition, the Central Bank requested all banks, NBFIs and others who are involved in the process to continue a close dialogue with the Central Bank and obtain guidance if the need arises. In this regard, the members of the special unit headed by the Assistant Governor were introduced to the banks and NBFIs at these meetings. In keeping with the request of the Central Bank, banks and NBFIs agreed to submit their preliminary proposals re. the Consolidation effort by 31March 2014.

A meeting was also held with key office bearers of the Ceylon Bank Employees’ Union, at which all clarifications sought were provided by the Governor of the Central Bank and other senior officials of the Central Bank. The Central Bank also held discussions with leading Consulting firms with regard to their provision of consultancy services in respect of valuations, accounting and other services. These meetings helped to provide a clear understanding of the process which will help all stakeholders to move forward with clarity and certainty.

In the meantime, the Central Bank also wishes to inform the general public that the Consolidation process will not, in any way, affect their current transactions and deposits with the banks and finance companies, with whom they are presently transacting.