Money Flowing Out of Emerging Market ETFs
In the week ended 16 November $6.6-B flowed out of EM (emerging-market) debt, according to the data, halting 18 consecutive weeks of inflows.
In the 2nd full week of November, ETFS (exchange-traded funds) that buy emerging-market securities saw withdrawals around the world worth $1.4-B. While the rising USD would seem to help EMs by boosting their exports, that is more than offset by other negatives, such as rising interest rates that are driving money out of those economies.
US President Elect Donald Trump’s America First protectionist plans may soon add to the pain.
Donald Trump has promised to abandon the tariff-cutting Trans Pacific Partnership (TPP) trade agreement between the US and most Asian nations. He may also make changes in the North American Free Trade Agreement (NAFTA) that will hurt America’s Mexico.
On the campaign trail Donald Trump branded China as a currency manipulator and talked of a 45% duty on Chinese imports. Even though he has toned down that position, investors are concerned.
Not all emerging markets are equally vulnerable.
Those that can weather a protectionist storm and higher interest rates are those with current-account surpluses, including the Philippines, South Korea, Malaysia, Taiwan, China and Poland. Their foreign-currency reserves provide the money to fund any outflows of Hot Money without provoking a collapse in their own currencies.
Notably: China’s reserves are down 22% from their Y 2014 highs.
The losers are those emerging markets without that Key buffer: Brazil, India, South Africa, Argentina, Egypt, Indonesia, Mexico and Turkey.
They have current-account deficits, so are importing capital to fill the gaps and have to take stringent measures as foreign money flees. Their Forex (foreign-exchange) reserves tend to be slim, about 50% the size of those of the group I mentioned above, in relation to GDP (gross domestic product).
In contrast to the healthier emerging market economies, the deficit countries have currencies that have been falling Vs the USD for the past 6 years.
Economic growth among the deficit economies has been weak except for India, which may in time join the healthy group if Prime Minister Narendra Modi succeeds in curbing corruption, eliminating economy-distorting subsidies and reducing anit-business-regulations.
With inefficient economies, slow growth and entrenched corruption, the deficit economies also have much higher inflation levels than the surplus economies. And, with inflation problems and pressure to support their currencies, all except India have seen central bank rate hikes in recent years, in contrast to rate declines in the healthier group.
All EM leaders aim to drive economic growth and curtail foreign capital flight while controlling political and social unrest and avoiding the effects of increased global protectionism.
The International Monetary Fund (IMF) estimates that a surge in global protectionism could reduce global GDP by more than 1.5% in the years ahead. That would make the job even harder and helps explain why EMs are out of favor.
Have a terrific week.