Emerging Equity Funds Have Biggest Outflow Since 2008

Emerging-market equity mutual funds had their biggest weekly outflows since mid-2008 as investors speculated rising interest rates will curb economic growth, according to Citigroup Inc.

The funds lost $3 billion during the week ended Jan. 26, Citigroup’s Hong Kong-based strategist Markus Rosgen wrote in a report today, citing data compiled by research firm EPFR Global. The outflows amounted to 0.4 percent of the funds’ assets, the most since May, Rosgen wrote.

Investors are paring bets on shares in the fastest-growing economies after pouring more than $90 billion into emerging- market stock funds last year, the biggest-ever annual inflows, according to EPFR data. China has lifted interest rates twice since October, while Brazil and India raised borrowing costs this month as record food prices and oil above $85 a barrel boost inflation. The MSCI Emerging Markets Index has declined 1.4 percent this year, compared with a 3.1 percent increase in the MSCI World Index of developed-nation shares.

“Inflation is an excuse for people getting out of emerging markets,” Lee King Fuei, a Singapore-based money manager at Schroders Plc, which oversaw $286 billion as of September.

The last time weekly outflows reached these levels, developing-nation shares were in the midst of their worst bear market as the global financial crisis and interest-rate increases from Brazil to India curbed economic growth. The funds lost more than $40 billion for all of 2008 as the MSCI emerging- market index declined 54 percent, according to EPFR.

Food Protests

The 21-country gauge dropped 0.6 percent to 1,134.82 at 7:01 a.m. in New York and was poised for its second straight weekly loss.

Russia’s worst drought in a half-century helped send a United Nations gauge of food prices to an all-time high last month, cutting the buying power of 2.8 billion people in the so- called BRIC countries who spend 19 percent of their income on groceries, compared with 6 percent in the U.S., Euromonitor International data show.

Rising milk and flour costs triggered protests in Algeria this month that left three people dead and 420 injured. Tunisian President Zine El Abidine Ben Ali was forced to hand over power to his prime minister on Jan. 14 and leave the country after failing to end a month of protests by promising lower prices for bread and sugar.

Switch to Developed

The Tunisian protests inspired anti-government groups in Egypt to hold rallies against the administration of President Hosni Mubarak, sending the benchmark EGX 30 Index of the nation’s shares to an 18 percent decline since Jan. 20.

Inflation in seven of the 10 biggest developing nations accelerated during the most recent month that government reports were available, according to data compiled by Bloomberg Jan. 24.

This week’s fund flows show that investors are pulling money out of emerging markets to invest in slower-expanding developed nations, according to Citigroup’s Rosgen.

The Standard & Poor’s 500 Index has climbed 3.3 percent this year as reports showed the housing market is stabilizing and 132 of the 176 companies in the index that posted quarterly results since Jan. 10 beat the average analyst earnings estimate. The Federal Reserve kept its benchmark interest rate at a record low and maintained plans to buy $600 billion of Treasuries through June, according to a statement on Jan. 26.

India’s Bombay Stock Exchange Sensitive Index has tumbled 10 percent this year while China’s Shanghai Composite Index lost 2 percent and Brazil’s Bovespa declined 1.8 percent.

To contact the reporter on this story: Michael Patterson in London at mpatterson10@bloomberg.net; Weiyi Lim in Singapore at wlim26@bloomberg.net.

To contact the editor responsible for this story: Gavin Serkin at gserkin@bloomberg.net.

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