Published January 31, 2014
Spooked by extreme volatility in countries like Argentina and Turkey, global investors yanked $6.4 billion from emerging-market stock funds in the past week, the largest amount of outflows since August 2011.
The flood of cash from emerging markets highlights the high level of investor angst triggered by recent turmoil that has sent the currencies of many emerging market currencies plunging.
The turbulence has also weighed on U.S. markets, where the Dow Industrials were on track for their seventh slide in the last eight trading days and have officially entered “correction” territory.
In a report titled “First Signs of Panic,” Bank of America Merrill Lynch (BAC) said emerging-market stock funds around the world posted $6.4 billion of outflows in the week ending Wednesday. Emerging-market bond funds suffered $2.7 billion of outflows, the biggest amount since June.
To put those figures into perspective, BofA said the combined $9.1 billion of outflows from emerging-market stock and bond funds nearly rivals the huge exodus triggered by the May 2013 “taper” fears, the August 2011 debt ceiling debacle and the September 2008 implosion of Lehman Brothers.
While BofA called the withdrawals a “stampede,” it noted that another $15 billion worth of outflows in emerging-market equity funds over the next two to three weeks would actually trigger a contrarian “buy” signal based on the firm's EM flow trading rule.
In any case, the cash exodus has not been limited to emerging markets.
Stock funds around the world posted $10.4 billion in outflows in the week ending Wednesday, wiping out $6.6 billion of inflows in the prior week, BofA said.
Equity exchange-traded funds suffered $12 billion of outflows, while global stock mutual funds attracted $2 billion of inflows.
In the U.S., investors yanked $9.7 billion from equity ETFs, the largest amount since October, BofA said.
Some concerns have been raised about potential contagion, whereby panic in specific emerging markets like Argentina could spread to other markets and eventually infect the global banking system.
While many observers blame the emerging-market turmoil on the Federal Reserve’s decision to taper quantitative easing, others believe the central bank’s policies are just one factor.
Despite these worries, the Fed held firm this week in its strategy of dialing back monetary stimulus and did not even mention the turbulence in emerging markets.