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Emerging Market ETFs Stumble as Easy Money Dries Up


After signs of slowing growth and a string of protests in Turkey and Brazil, investors are exiting emerging market assets and exchange traded funds in droves, with the prospect of diminished global stimulus seen as the straw that broke the camel’s back.

Over the past week, the iShares MSCI Emerging Markets Fund (EEM) lost $795.9 million in assets and the Vanguard FTSE Emerging Markets ETF (VWO) experienced $111.8 million in redemptions, according to IndexUniverse data. Over the past month, EEM has declined 11.1% and VWO has decreased 11.7%.

In the three weeks to June 12, over $19 billion was funneled out developing market funds, with foreign investors dumping $5.6 billion out of Brazilian stocks and $3.2 billion out of Indian bonds this month, Bloomberg reports.

“These are pre-quake tremors: something big is coming,” Stephen Jen, the co-founder of hedge fund SLJ Macro Partners LLP, said in the article. “There’s tremendous deceleration in emerging markets. You may see crisis-like price actions without having a crisis.”

A number of factors are currently weighing on the emerging markets: popular protests gripped Instanbul, Turkey; Brazil is experiencing rising inflation and challenging government policies; the World Bank expects China to expand at its slowest pace since 1999; and other emerging countries has seen their current account deficits widen, including Indonesia, Brazil and Chile. [China ETFs Struggle After HSBC Pares GDP Estimate]

Recently, emerging markets are witnessing a severe pullback on speculation that the Federal Reserve and the European Central Bank will cutback quantitative easing.

“This is a dangerous period,” Jen added. “The Fed will start to normalize rates. It’s a gradual process, but the pressure will only point in one direction, which is in favor of the dollar and against emerging markets.” [Dollar ETF in Two-Day Surge After Bernanke Comments]

After years of “substantial inflows,” emerging markets are “vulnerable” to “global portfolio relocations,” Deutsche Bank AG analysts led by Marc Balston, said in the article.

JPMorgan is also warning clients to stay underweight in emerging market assets due to “negative momentum.”

“Developed-market investors have been heavily favoring emerging-market bonds and equities in recent years” due rapid economic expansions “systematically cheap” assets, JPMorgan strategists said in a note. “They are now starting to wonder whether this is still the case, and are slowly moving to neutral on emerging markets.”

For more information on the emerging markets, visit our emerging markets category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.