Emerging-market equity fund outflows slowed this week amid signs of an escalation in Europe’s debt crisis and weaker economic growth in China, Citigroup Inc. said.
Developing nations had $1.5 billion of outflows in the week ended May 23, according to Citigroup and Morgan Stanley reports today, citing data from fund researcher EPFR Global. There were net sales of $2.3 billion the previous week, Citigroup reported on May 18. Funds in Asia excluding Japan had the biggest redemptions of the year with outflows of $768 million in the most recent week, Citigroup said today.
It was too early to draw any conclusions from the slowdown in emerging-market equity fund outflows, “given that flows of individual regions worsened,” Kelly Kwok, one of the Citigroup analysts named in the bank’s report, wrote in an e-mailed response to questions. “With no clear solution to the Greek problems and more data pointing to weaker growth in China, there should be no surprise that EM equity fund flows continued for another week.”
MSCI’s developing-nation index has fallen 0.9 percent this week, poised for 10 straight weeks of declines, which would be the longest string of weekly losses since 1994. Stocks have fallen in that time as speculation mounted that Greece may exit the euro group, while China reported April industrial production grew the least since 2009 and foreign direct investment sank for a sixth month.
The emerging-market measure fell 0.4 percent to 898.97 at 12:32 p.m. in Hong Kong. The gauge trades at 9.6 times estimated earnings, compared with 11.7 for the MSCI World Index of advanced nations.
Bond Fund Outflows
Greece is preparing for a second election on June 17 following an inconclusive ballot this month. Fitch Ratings cut Greece’s credit rating by one level on May 17, citing concerns the country won’t be able to muster the support needed to sustain its membership in the euro area. Italian Prime Minister Mario Monti said yesterday Greece will probably stay in the euro and that a majority of the region’s leaders support issuing a joint bond to fight the debt crisis.
Funds dedicated to emerging-market bonds had $478 million of outflows in the week ended May 23, marking the first weekly withdrawal since Jan. 11, according to a Barclays Plc report today that cited EPFR data.
Brazil had the largest outflow among emerging markets in the latest week, with withdrawals of $380 million, Jonathan Garner, Morgan Stanley’s Hong Kong-based emerging-market strategist, wrote in a report today. China was second largest with redemptions of $320 million, according to the report.
Garner said he’s looking for a longer trend of outflows to indicate a market bottom and that interest-rate cuts in China could be the potential catalyst for a turnaround in emerging markets. Morgan Stanley foresees two interest-rate reductions in China this year, with one as early as June, Garner said in an interview in Bloomberg’s Hong Kong office today.
“To get global money reenergized, there needs to be evidence that China will engage in self-help in terms of reviving its economy,” Garner said. “The thing for those bullish about emerging markets is to understand that China has more policy options available than other economies.”