Emerging market funds clock third-most weekly outflow

Emerging market funds saw the third-largest weekly outflow on record as investors world wide heavily sold equities fearing volatile markets.

Markus Rosgen, Kelly Kwok and Yue Hin Pong of Citigroup Global Markets said investors withdrew $7.7 billion (Rs34,911 crore) from these funds in the week ended August 10.

The largest redemption yet was in January 2008, when $10.7 billion moved out.

Emerging market funds invest in markets such as India, China, Brazil and Russia, among others.

“There’s risk aversion around the world, which is leading to outflows from risky asset classes such as emerging market equities, oil and commodities. The global cyclicals have been hammered with signs of the US economy not in a good shape,” said Ritika Mankar, economist at Ambit Capital.

Funds focused on the Asia excluding Japan were down $2.9 billion (Rs13,148 crore) while global emerging market funds saw outflows of $3.2 billion (Rs14,508 crore), the Citi analysts wrote in a note.

There were more redemptions from actively managed funds than exchange traded funds which tend to invest in a basket of stocks that move in tandem with the market.

Emerging market funds have seen net outflows of $14 billion since January this year, but India has managed positive inflows in the first half — the only country other than Malaysia to manage the distinction, the Citi analysts said.

Fundmen with low levels of cash may be forced to raise capital to meet redemptions.

“Latest data show that cash levels remained below long term averages as of June...” Rosgen, Kwok and Pong said,  alluding it was about 100 basis points lower.

In India, foreign institutional investors have so far sold equities worth Rs5,210.50 crore in August.

“People are adopting a cautious approach, depending on how things work out in the US and Europe but India is still at a premium to other markets in the region,” said Ajay Parmar, head of institutional research at Emkay Global Financial Services.

Outflows from India may depend on whether or not fund managers would need to sell Indian equities to meet redemption calls even as cash levels run low.

“If risk aversion remains at elevated in the wake of global concerns, we may see muted flows into emerging markets like India in the near term,” said Mankar.