EMs' Dec capital outflows hit 18-month high of US$11.5b

Tokyo

FOREIGN investors withdrew a hefty US$11.5 billion from emerging market stocks and bonds in December - the biggest drain since the "taper tantrum" of June 2013 - but Asian markets can take some comfort from the fact that they escaped fairly lightly compared with other regions.

Latest monthly data from the Institute of International Finance (IIF) in Washington reveals how sharply portfolio investors reacted to a series of overall bearish developments, including the dramatic slump in global oil prices and the Russian rouble crisis.

"December was by far the weakest month for EM (emerging market) portfolio flows this year (2014)," according to Robin Koepke, an economist at the IIF and lead author of a regular report published by the institute.

In December, portfolio flows to emerging markets are estimated to have slumped to minus US$11.5 billion - "the sharpest retrenchment since the 'Taper Tantrum' in June 2013", the IIF report observed. Emerging Europe appears to have been most affected, while flows to emerging Asia are estimated to have been slightly positive on net, with modest debt inflows more than offsetting a limited retrenchment in equity flows.

The institute's monthly EM Portfolio Flows Tracker focuses on eight major emerging markets - India, Indonesia, Thailand, South Korea, Brazil, Mexico, Hungary and Ukraine - which all publish high-frequency portfolio flows data.

Debt flows fell to minus US$7.8 billion and equity flows declined to minus US$3.7 billion in December, "amid rising risk aversion and an increase in market expectations for future Fed policy rates", the IIF report observed.

Flows reversed "in all emerging market regions except Asia, where inflows were supported by foreign purchases of Indian bonds and strong equity issuance across the region".

Prior to that, emerging market capital inflows had been positive on balance for almost 18 months.

"Investor sentiment towards emerging markets appears to have taken a significant turn for the worse in the last few weeks," said Mr Koepke. "The weakness in flows is likely to reflect a general increase in risk aversion in the context of the Russian currency crisis and the remarkable decline in oil prices."

Daily market data suggests "a sharp deterioration in investor sentiment in the second week of December, around the time when pressures on Russia intensified and Brent oil dipped below the US$65 per barrel mark", the IIF report noted. "Among the countries that publish high-frequency data, the sharpest retrenchment occurred in Mexico, South Africa, and Brazil."

Emerging market issuance of new bonds is meanwhile estimated to have slowed to US$32 billion in December, while equity issuance "is tracking at a multi-year high of US$109 billion for December", the report added.

The IIF is a global association for the financial industry, with nearly 500 members including leading banks and other financial institutions from 70 countries. Its portfolio flow data is regarded as authoritative.