Emerging Market Drop Could Be First Wave

The flight of investors from the once-booming emerging markets they previously favored with $7 trillion-worth of inflows may have only just begun.

It is mainly retail investors who have packed their bags and moved on to date. If and when big institutional firms join in, there is a risk of wholesale capital flight.

Signs of China slowing down and the global impact of a wind-down in U.S. monetary stimulus – effectively draining money from the system – have been particularly punishing in emerging economies dependent on external financing.

Currencies in Turkey, Argentina and Russia have hit record lows, for example, lifting safe-haven yen, Swiss francs and U.S. Treasuries in a sign of global contagion.

Such moves are crucial factors for foreign investors because exchange rate losses can easily wipe out any gains in stocks bonds in the high-yielding emerging world.

However, data on capital flows shows many long-term investors have either stuck with, or even added to, their emerging holdings. The outflows of over $50 billion seen since 2013 have largely been driven by retail investors.

via Reuters

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza