Bulls may bail out of emerging markets

 

Source :19 May 2010, 0513 hrs IST,Deeptha Rajkumar,ET Bureau

MUMBAI: The dream run of emerging market stocks may be coming to an end, with risk-averse global investors pulling out funds as the world stares at the spectre of sinking back to economic contraction with troubles brewing in Europe and China.

International investors have pulled out $890 million from India this month, the highest since January 2009 following the collapse of Lehman Brothers, in what could just be the beginning if global economic problems persist.

Shaky markets and the possibility of policy actions such as interest rate hikes to stave off inflationary threats may be a drag on emerging stocks for some months to come. Indian shares may fall as much as 10%, say investors.

“Emerging markets have had a great run, but now investors are taking a breather,” said Jyotivardhan Jaipuria, managing director and head-India research at BoA Merrill Lynch. “Our fund manager survey indicates that they have become more cautious about investing in emerging markets.”


The MSCI Emerging Markets index is down about 9% from last month’s highs and China is down more than 20%. Indian stocks are down 6.5% from their peak, after climbing 81% in 2009.

International markets have been see-sawing as some believe the $1-trillion European Union aid package to save economically troubled nations such as Greece and Spain may not be enough to prevent another credit crisis. Rising fears about China’s growth faltering due to government attempts to cool down the economy have exacerbated investor concerns.

“The European crisis will impact India flows negatively in the near term as risk taking gets cut back,’’ said Pankaj Vaish, managing director and head-equities at Nomura.

Emerging market equity funds had a second straight week of redemptions, according to EPFR data for week ended May 12.

China equity funds posted their second straight week of outflows. Emerging Europe, Middle-East and Africa funds also lost $350 million. As investors flee to safe-haven assets such as the US treasury and gold, Indian stocks could fall further, investors say.

“There could be continued short-term selling in emerging markets and Indian equities. Markets could fall another 5-10% from these levels,” said Sam Mahtani, director, emerging market equities, at F&C Asset Management. “There will be no upmove till such time fears recede over global issues.’’

US assets such as the treasury, shares and gold are preferred as they are seen as safe, at least for now. Shares in the US are up 2% this year. The US dollar has once again emerged as a safe-haven asset even for central banks. Central banks across the globe raised their holdings to $2.7 trillion in March, from $2.67 trillion in February. Gold prices are near record highs.

Emerging market growth, which has been higher than the developed world in the last decade, is also under threat given that most central banks are poised to raise interest rates to temper inflation. China’s inflation rate may touch 3% soon, prompting a rate increase, and in India it is already above the central bank’s target.

“Systemic risk has reduced for the moment but investors know it has not vanished,” said Munish Varma, head-global markets India at Deutsche Bank. "That has prompted investors to liquidate some of their risky holdings and move into safer assets as seen from the demand for US treasuries last week and record high price of gold.”