Investors are stepping up withdrawals from emerging-market exchange-traded funds and shifting into Europe as concern mounts that growth is faltering in developing nations while advanced economies strengthen.
Withdrawals from U.S.-based ETFs investing in emerging-market equities and bonds totaled $11.3 billion this year, already surpassing the redemption of $8.8 billion for the whole of 2013, according to data compiled by Bloomberg. Funds investing in European assets added $5 billion in the first two months of 2014, compared with $18 billion full-year inflows in 2013.
Returns in emerging-market stocks this year are trailing their European peers the most since 2011 as China’s economy slowed, currencies from Turkey to South Africa tumbled while violent protests in Ukraine fueled geopolitical tension. In Europe, economic confidence increased for a ninth month in January, suggesting the scars from the ravages of the sovereign-debt crisis in 2011 are healing.
“What you see is the transition of funds from emerging to developed markets,” Scott Rodes, a money manager at Bahl & Gaynor Inc., who helps oversee $11 billion, said by phone from Cincinnati today. “Investors view Europe as a safe place. The fundamentals are going to be challenging for the emerging markets for at least six months.”
The MSCI Emerging Markets Index has lost 3.9 percent this year, while the Stoxx Europe 600 Index rose 2.7 percent, the biggest divergence for the start to a year since 2011. In 2013, the developing-nation gauge slid 5 percent, compared with a surge of 17 percent for the European measure. The benchmark for emerging-market equities advanced 0.7 percent to 963.23 today.
Total assets of emerging-market stock ETFs declined by 10 percent to $93 billion this year, while bond funds declined 2.5 percent to $8.8 billion, Bloomberg data show.
The IShares MSCI Emerging Markets ETF had the biggest outflows this year among 1,962 funds tracked by Bloomberg after the SPDR S&P 500 ETF Trust, which consists of a portfolio representing all stocks in the Standard & Poor’s 500 Index. The IShares MSCI fund lost $7.4 billion, or 18 percent of its assets, to $31 billion. The Vanguard FTSE Emerging Markets fund declined $3.5 billion to $41 billion.
Two of the European stock ETFs were among the top 10 funds that received the biggest inflows this year. Investors added $1.6 billion to Vanguard FTSE Europe ETF, boosting the fund’s assets to $15.6 billion. IShares MSCI EMU ETF attracted $1.5 billion to $10 billion.
Growth in China, which buys everything from Brazil’s iron ore and Malaysia’s oil, is slowing as the government curbs lending. A government report on March 1 may show that manufacturing stagnated in February for the first time since September 2012, according to the median estimate of 29 economists in a Bloomberg survey.
Central banks in Turkey, India, South Africa and Brazil have increased interest rates this year to stem currency depreciation, dimming the outlook for growth.
Political turmoil has also helped decrease demand for emerging-market assets. An interim government took charge in Ukraine as Viktor Yanukovych was ousted as president last weekend after a three-month protest in Kiev’s Independence Square ended in a bloody crackdown and 82 deaths. Protests against shortages of basic goods, rising crime and the world’s fastest inflation are threatening Venezuela’s President Nicolas Maduro’s grip on power.
“The rise in geopolitical risks” is weighing on investors’ sentiment, Timothy Ghriskey, chief investment officer at New York-based Solaris Group LLC, which manages about $1.5 billion in assets, said by phone today. “What is even more important is what’s going on in China, which is sending ripples across all the emerging markets. To say now is the time to buy, we’re not there yet.”
Data today showed that euro-area economic confidence unexpectedly rose in February, led by the services industry. Gross domestic product in the 18-nation euro zone will rise 1.2 percent in 2014, an improvement from a 1.1 percent forecast in November, the Brussels-based European Commission said Feb. 25.
“The GDP growth in many European countries is still slow, but there is this general confidence that the pace of growth will not decline,” said Bahl & Gaynor’s Rodes.
This year’s decline in the MSCI Emerging Market Index sent valuations to 10.3 times estimated earnings, compared with a multiple of 14.9 times for the MSCI World gauge of advanced economies, according to data compiled by Bloomberg.
About 43 percent of investors surveyed by Societe Generale SA in February said they were bullish on emerging markets for the next three months, while 41 percent were bearish, the French bank said in a report today. The investors preferred dollar-denominated bonds while currencies were the least favorite, according to the survey.
“I wouldn’t say take all your money and put it in the emerging markets, but wouldn’t say take all your money and put it in developed markets either, because I think you’re going to be missing some opportunities,” David Rubenstein, Carlyle Group LP co-founder, told Bloomberg’s Cristina Alesci at the SuperReturn International Conference in Berlin.