Emerging market securities are facing the worst losses in nearly three decades, weighed down by rising global interest rates, sluggish growth and the crisis in Ukraine.
The benchmark emerging country dollar-denominated sovereign securities index, JPMorgan Global Diversified, has yielded about 15 percent of total returns so far in 2022, its worst start since 1994. This decline was mitigated slightly by the widespread recovery of global markets. Days recently, the seven-week losing streak on Wall Street stocks came to an end.
According to EPFR data, about $ 36 billion in emerging market mutual funds and bond trading funds have flown out of the market since the beginning of this year, and stock market inflows have declined since the beginning of May.
“This is the worst start I can remember across Asset Class and I have been working in emerging markets for over 25 years,” said Brett Diamond, Head of Global Emerging Market Credit, Aberdeen Investments.
Emerging economies have been hit hard by the corona virus epidemic and their public funds are struggling. High inflation, slowing global growth and the political and financial turmoil resulting from the crisis between Russia and Ukraine have added to the economic pressures facing emerging economies. And investment outflows threaten to exacerbate its problems by reducing cash flow.
According to David Honor, head of emerging market strategy and economics at Bank of America Global Research, the situation is expected to worsen. “The important thing is that the world has the highest inflation rate, and monetary policymakers are still amazed at how high it is,” he said. “This means more monetary tightness and the central banks will continue to do so until something collapses, the economy or the market.”
Higher yields in emerging markets such as the US – as central banks raise interest rates – have not made emerging market securities attractive, said Yarlon Chestikov, global head of emerging markets in Amundi. “At best, you’ll get zero returns, and at worst, you’ll face financial losses this year.”
According to Honor, high interest rates in large advanced market economies are not bad for emerging market assets if they are accompanied by economic growth. “But not now – we have a huge stagnation problem, and in some places like the US the central banks are raising interest rates to control widespread inflation. This is a very unhealthy background for emerging markets.”
China, the world’s largest emerging market, faced the biggest sales.
Jonathan Forden, an economist at the Institute of International Finance, who monitors cross-border portfolio flows in emerging markets, said concerns about geopolitical risks have been heightened by the government-imposed recession in the wake of the crisis between Russia and Ukraine. Locks to continue the zero-govt policy.
He pointed out that after adding the country to the world indexes, Chinese assets have received so-called negative receipts over the past two years.
But this year, such receipts have fallen, with more than $ 13 billion out of the Chinese bond market in March and April, and more than $ 5 billion in Chinese stock markets, according to data from the Institute of International Finance.
“Throughout this year we have been working on a provisional forecast for a negative outflow from China. This is very important,” Forton said.
Fund managers did not allocate some of the money withdrawn from China to other emerging market assets, which led to a widespread collapse, saying “everyone is moving from emerging markets to one asset class and moving to safer assets.”
The shock of commodity prices caused by the crisis in Ukraine has increased the pressure on many developing countries that depend on imports to meet their food and energy needs.
But this has led to the emergence of some winners among freight exporters. Local currencies in the JPMorgan GBI-EM Emerging Markets Index have yielded less than 10 percent in dollar terms so far this year, but Aberdeen’s Diment notes that there are widespread variations across the country.
Bonds issued by Hungary, which is close to the Russia-Ukraine dispute and dependent on Russian energy imports, have lost 18 percent so far this year. In Brazil, a major exporter of industrial and food products, commodity prices rose 16 percent against the dollar.
Diment said emerging market bond ratings “now look very attractive” and that Aberdeen has seen net inflows into emerging market bond funds so far this year.
The Honor of the Bank of America, however, argued that the bottom line was that central banks could only shift their focus from fighting inflation to encouraging growth. “It may happen occasionally in the fall, but we still don’t seem to be there,” he said.
The rise in inflation will depend on whether the global economy recovers to a balance between lower inflation and lower interest rates, Costikov said. He warned that the alternative would be for the US to enter recession next year, which would further slow global growth and boost growing market yields.