Emerging market bond fund outflows will hit $70 billion in 2022

Investors have withdrawn a record $70 billion from emerging market debt funds this year, a sign that rising interest rates in advanced economies and a strong dollar are increasing pressure on developing countries.

According to a JPMorgan analysis of data from EPFR Global, a fund flow monitor, investors spent 4.2 billion in the past week alone.

The investor flight underscores how emerging markets face increasing risks from rising interest rates in developed countries, which make the typically high yields on emerging market bonds less attractive. Strong gains in the greenback also make it more expensive for emerging markets to service dollar-denominated debt and increase the cost of importing commodities, which are often valued in US currency.

JPMorgan in September raised its forecast for 2022 EM bond outflows to $80 billion from a previous forecast of $55 billion.

Milo Gunasinghe, emerging markets strategist at JPMorgan, described the outflows as unrelenting, with only seven weeks of net inflows year-to-date. They were also diversified, with investors withdrawing money from funds holding both local and foreign currency bonds.

Column chart of EM bond fund inflows and outflows, $bn shows EM bond funds suffer largest outflows on record

Rather than weigh the relative risks of currency exposure, investors simply exit. It marks a sharp reversal: Over the past six years, both types of bond funds have been positive with a combined average of more than $50 billion per year.

Gunasinghe said rate hikes and bond selling by central banks, which have significantly reduced the liquidity pulsing through global markets, “will set a high bar for inflows for the foreseeable future.”

Shilan Shah, senior economist at Capital Economics, said cross-border capital flows from non-resident investors into the limited group of emerging markets that provide timely data tell a similar story: bond flows have been consistently negative this year, while stock flows have been choppy in recent weeks become strongly negative.

Many analysts saw an improving outlook for EM assets earlier this year as economies began to recover from the pandemic. Russia’s war in Ukraine thwarted this, although some commodity exporters benefited from soaring prices – until global inflation and the rising dollar turned against them. Again, some analysts see an opportunity in today’s deeply discounted valuations.

But Shah, like Gunasinghe, expects the outflows to continue for the rest of the year. The slowdown in global growth and trade, with a consequent drop in investors’ risk appetite, will add to the headwinds, he said.

https://www.ft.com/content/fe34de37-9389-4672-81a3-738cc044d4a6 Emerging market bond fund outflows will hit $70 billion in 2022

Adam Bradshaw

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