BUSINESS and FINANCE

Emerging Markets Suffer Biggest Outflow In 7 Years

Does the emerging market selloff present a buy opportunity to global investors?

For the last 6 years, the emerging markets and the developing economies have received billions of dollars from global investors through the Fed’s policy of easy money. These funds from the developed world have financed huge infrastructure developments and corporate investments in the emerging markets. As a result of the low interest rates, investors have made sweet ROI. However, this tide of fast and cheap money is slowly coming to an end as fed looks forward to increase the interest rates.

In anticipation of Wednesday’s fed decision, investors have accelerated their strategy to liquidate their positions in the emerging markets. This has also been fuelled by the fed’s announcement that it would complete the quantitative easing program.

In last week alone, global investors sold more than $9 billion of stocks in the emerging markets. This is the most the investors have withdrawn since the financial crisis of 2008. According to data by EPFR Global, most of the funds from the selloff was from Asia which has become very vulnerable. Other than the fed’s decision, other factors were at play in the outflow.

The World Bank Downgrade

Last week, the World Bank released a report which indicated a slowdown in the global economy. In 2015, the global economy will grow by 2.8%, which is 0.2 points below the earlier expected number. This slowdown in the global economy is attributed to the reduction in commodity prices and the strength of the dollar against other currencies. The oil prices have recently been hit hard because of overproduction. Other commodities such as gold, coffee, platinum and tea have all taken a downward trend.  Other reasons for the downgrade are the volatility instances in the Eurozone and China.

Oil Chart 5 years

 

5 year chart of oil

With the weakening of the global economy, American investors are of the opinion that investing in the United States is better than risking capital in low yielding countries. This year, data coming from the United States show positive strides towards recovery.

The Strengthening of the Dollar

Dollar index chart

5 year chart of the dollar index

The dollar has consistently gained ground compared to most currencies. This has resulted from the strengthening of the American economy with data showing strides of recovery. All data released recently are a sign that the economy is doing well. Data ranging from employment to payrolls have constantly beat analysts’ forecasts. The dollar has responded to the positive data by becoming stronger than all the peers.

With the stronger dollar, the emerging markets and the developing world has been hit strongly. This is because these countries export their commodities in dollar terms. Therefore, the result is that the emerging countries are paying a higher fee in exporting their products which leads to weakening of their economies. In Kenya for instance, the currency has fallen to sh.97 against the dollar. Kenya, as a major importer is paying more for the products it imports.

China

According to the report by EPFR Global, most of the funds withdrawn were from China. This is after the giant data compiler, MSCI announced that it won’t include Chinese stocks in its index. The compiler made the announcement stating that Chinese stocks were not yet ready to be included in the index.

For more than one year, investors have speculated that China’s Yuan dominated A shares would be added to the MSCI’s index. This led to an increase in activity in the Chinese bourse leading to an increase in investors’ wealth. However, a bullish run can still be expected going by MSCI’s statement that it will include the Chinese shares in the index as soon as regulatory issues are solved.

According to Remy Brand, the managing director of MSCI global investors are looking forward to the liberalization of the Chinese market. “I believe the outstanding issues with the regulators will be solved eventually.” He said.

In the Chinese communist regime, the authorities regularly monitor inflow and outflow of capital in the country. They believe that foreign investments has the capability of harming the economy.

Other factors such as the German yields further contributed to the global emerging market sell-off. Is this the best time to buy the emerging markets? Analysts at Barclays believe that the sell-off presents a sweet opportunity to investors to load up their emerging market portfolios.

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