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Emerging market fund ‘exodus’ continues as investors drop stocks and bonds

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Investors continued to pull money from emerging market funds last week, according to EPFR Global, although recent declines in other asset classes slowed.

The fund flow data provider reports that more than $3bn flowed out of emerging market equity funds worldwide during the week ending 19 June, while outflows from emerging market bond funds hit a 90-week high as the “exodus” from these regions continues.

Investors channelled money out of funds focused on top-tier emerging markets such as China, Brazil, Russia and South Africa. However, they maintained interest in frontier markets, as funds investing in this area have witnessed net inflows every week since mid-March.

Despite outflows from emerging market funds, investors added to equity portfolios in general ahead of last week’s Federal Reserve monetary policy meeting. Overall, equity funds benefited from $4.81bn in fresh money over the week ending 19 June.

In addition, the pace of outflows from bond funds were about half of the record $14.45bn seen in the previous week. EPFR Global says this suggests investors expect the outcome of the Fed’s meeting to be “relatively benign”, although it turned out that chairman Ben Bernanke said quantitative easing could slow if the US economy continues to pick up momentum.

EPFR Global research director Cameron Brandt says: “The Dow’s 354 point drop the day after Fed chair Ben Bernanke statement indicates investors did not get what they were looking for from the US central bank.

“With the second of the year’s four ‘triple witchings’ [or the simultaneous expirations of some futures and options] and China’s banking system getting fresh scrutiny, we think there is a good chance of big swings in fund flows during the coming week.”

The latest BofA ML Fund Manager Survey shows asset allocators’ weightings to emerging markets “collapsed” during June as investors took a net 9 per cent underweight to the region.

Just four months ago, a net 43 per cent of fund managers had an emerging market overweight, but 32 per cent now rate a so-called hard landing in China as their top tail risk.

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