Emerging Stocks’ Fund Outflows Double After Operation Twist

Emerging-market equity funds posted a ninth week of outflows, with withdrawals almost doubling from the previous period, as the Federal Reserve’s efforts to bolster the U.S. economy disappointed investors, Citigroup Inc. said.

Investors pulled a net $2.6 billion from developing-nation stock funds in the week ended Sept. 28, compared with $1.4 billion in the previous week, Citigroup analysts led by Markus Rosgen wrote in a report, citing figures from EPFR Global.

The MSCI Emerging Markets Index sank 6.3 percent on Sept. 22, the most since 2008, after the Fed said a day earlier it will replace much of the short-term debt in its portfolio with longer-term Treasuries in an effort to further reduce borrowing costs and keep the economy from relapsing into a recession. The policy is known as Operation Twist because of the goal of bending the yield curve.

“Investors were increasingly worrying about longer-term global economic growth,” Rosgen wrote in the report.

MSCI’s emerging-market gauge fell 1 percent to 886.00 at 10:24 a.m. in Singapore, paring its weekly gain to 2.8 percent. The measure has dropped 23 percent since June and is bound for the largest quarterly loss since the final three months of 2008, as the U.S. economy faltered and the European sovereign-debt crisis spread.

Asia, Latin America

Asian-excluding-Japan equity stock funds reported outflows of $1.5 billion, while Latin American funds posted withdrawals of $333 million, according to the Citigroup report. Funds investing in central and eastern Europe, the Middle East and Africa were the “hardest hit” relative to assets under management, losing $638 million of funds, the analysts wrote.

European policy makers are facing increased pressure to do more to stop their debt crisis from further weakening the world’s financial markets and economy. U.S. Treasury Secretary Timothy F. Geithner warned at the annual meeting of the International Monetary Fund last weekend that failure to combat the Greek-led turmoil threatened “cascading default, bank runs and catastrophic risk.”

The U.S. economy faces a “rapidly rising risk of recession” and that may worsen the “bear market” in equities, DBS Group Holdings Ltd. said in a presentation to reporters in Singapore on Sept. 26. Data today may show personal spending in the world’s largest economy grew at a slower pace in August, according to the median forecast in a Bloomberg News survey of economists.

To contact the reporter on this story: Weiyi Lim in Singapore at wlim26@bloomberg.net

To contact the editor responsible for this story: Darren Boey at dboey@bloomberg.net

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