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Emerging Market Fund Flows Summary

Core Content

Emerging Market (EM) funds experienced significant outflows in the week ending 19 August, totaling USD 8.3 billion, marking the fastest pace since the 2013 Taper Tantrum. This was driven primarily by equity outflows (USD 5.9 billion), followed by local-currency bonds (USD 1.3 billion), hard-currency bonds (USD 770 million), and blended-currency bonds (USD 414 million).

Main Points

Equity Flows

• Asia: Led EM equity outflows at USD 4.1 billion. Key contributors included Korea (USD 900 million), Taiwan (USD 650 million), and Thailand (USD 480 million).
• India: Outflows halted after a one-week peak of USD 33 million.
• Korea and Thailand: Showed small inflows.
• Malaysia: Has not reported August flows.
• Latam: Recorded USD 499 million in equity outflows, with Mexico leading at USD 260 million. Brazil followed closely with USD 183 million in equity outflows.
• CEEMEA: Limited outflows to USD 230 million, with marginal inflows in Turkey. However, EPFR data only covers fixed income, and short-term currency deposits are increasingly financing current accounts.

Bond Flows

• Asia: Bond outflows amounted to USD 678 million.
• Latam: Bond outflows totaled USD 596 million, with Mexico leading at USD 149 million and Brazil at USD 356 million.
• CEEMEA: Bond flows were limited, but short-term currency deposits are financing current accounts in South Africa and Turkey.
• Overall: Latam has seen 13 consecutive weeks of outflows since late May 2015.

Key Countries and Their Flows

Asia

• Korea: Equity outflows of USD 900 million, with a small inflow in bond funds.
• Thailand: Equity outflows of USD 480 million, with small inflows in bond funds.
• India: Outflows halted after a peak of USD 33 million.
• Indonesia: Bond outflows of IDR 127 million.
• Foreign Ownership:
  • Korea: 54% of outstanding local-currency bonds.
  • Thailand: 17.1% of outstanding local-currency bonds.
  • Indonesia: 39% of outstanding local-currency bonds.

CEEMEA

• Turkey: Bond outflows of USD 1.3 billion, with foreign ownership at 29.3% of outstanding local-currency bonds.
• South Africa: Bond outflows of USD 770 million, with foreign ownership at 41.3% of outstanding local-currency bonds.
• Hungary: Bond outflows of USD 16.1 billion, with foreign ownership at 50.9% of outstanding local-currency bonds.

Latam

• Mexico: Bond outflows of USD 149 million, with foreign ownership at 36.4% of outstanding local-currency bonds.
• Brazil: Bond outflows of USD 356 million, with foreign ownership at 21% of outstanding local-currency bonds.
• Colombia: Bond outflows of USD 76 million, with foreign ownership at 16.1% of outstanding local-currency bonds.
• Foreign ownership in Latam:
  • Mexico: 36.4% of total domestic debt.
  • Brazil: 20% of total domestic debt.
  • Colombia: 24.5% of international reserves.

FX Reserve Accumulation

• Asia: FX reserves showed a monthly change, with some countries experiencing fluctuations.
• CEEMEA: FX reserves were increasingly financed by short-term currency deposits.
• Latam: FX reserves were also impacted by short-term currency deposits, with Mexico and Brazil showing significant foreign ownership in their domestic debt.

Key Insights

• The key to stabilizing EM flows is to reduce real funding costs in Developed Markets (DM).
• The flattening of the euro curve is expected to be the first bullish signal for CEEMEA.
• The structural changes in financing methods (short-term currency deposits) may delay the impact on bond flows.
• Non-ETF institutional investors showed outflows in Brazil (USD 23 million) and Mexico (USD 10 million).

Conclusion

The data highlights a significant outflow trend in EM funds, with equity outflows being the most substantial. Asia and Latam were the most affected regions, with notable outflows in several countries. CEEMEA showed limited outflows, but the role of short-term currency deposits in financing current accounts is significant. The key to stabilizing flows lies in the DM, particularly in reducing real funding costs and monitoring the euro curve for potential positive signals.