Emerging markets will continue to suffer hefty outflows as the U.S. Federal Reserve gets closer to “lift-off”, the Institute of International Finance (IIF) warned on Monday, following a report that showed the asset class witnessed its biggest exodus last week in seven years.
“We think the weakest emerging markets are likely to continue to suffer from pretty large outflows both on the debt side and equity side,” Jean-Charles Sambor, Asia Pacific director at the IIF, told CNBC on Monday.
Emerging markets with weaker macro fundamentals were the most vulnerable, he said, citing the Middle East and Latin America.
Investors withdrew $9.3 billion from emerging market funds in the week to June 11, according to funds tracker EPFR, the most since 2008 – the height of the global financial crisis. The bulk, or $7.1 billion, was pulled out of Chinese equity funds. Meanwhile, global emerging market funds saw $829 million of outflows and Latin America funds lost $442 million.
A combination of factors have led to heightened outflows, say analysts, including a stronger U.S. dollar, expensive valuations on emerging market assets and a rise in developed-government bond yields, which has dulled risk appetite.
While China was hit hard last week, Sambor expects Asia as a whole will be relatively shielded compared with other regions.
“Of course there are a couple of countries which we’re still concerned [about]. We think Indonesia could be under quite a lot of pressure, but overall Asia is better positioned than other emerging markets, when and if, the Fed tightens,” he said.
The IIF’s base case is for the Fed to begin hiking interest rates in September, as many expect. The U.S. central bank’s upcoming meeting on Tuesday and Wednesday will be closely watched for clues the timing of its first rate increase in 9 years.