Money exits emerging market funds as Iran conflict reverberates
NEW YORK (March 13) Flows of money into emerging market bond funds fell in the week to March 11, while those into emerging market equity funds flattened after five straight weeks of inflows, shaken by the war in Iran, analysts said on Friday.
Investors are fleeing assets perceived as risky due to the uncertainty caused by the conflict and surging oil prices, opens new tab, even though some say the strong fundamentals of many emerging economies could help shield them from the fallout.
"EM credit had been remarkably resilient to the AI disruption-driven gyrations in broader risk markets in February," Barclays head of EM credit research Andreas Kolbe wrote in a note. "But recent events in the Middle East, and the associated spike in energy prices, have quickly shifted the narrative from a "goldilocks"-type environment to stagflation."
He referred to the view that emerging markets had been in an ideal investment position due to the weaker U.S. dollar, years of post-COVID-19 reforms and solid central bank policymaking. Stagflation - low growth and high inflation - could derail that.
Morgan Stanley analysts said outflows from global-mandated emerging market funds reached $1.1 billion in the past week, based on data from EPFR, compared with inflows of $3.2 billion in the prior week.
Matt Vogel, head of emerging markets strategy with Marex, said EPFR figures show a year-to-date record 21 billion of inflows into EM debt funds, despite this week's moves.
Emerging markets had been enjoying a more than year-long rally, with everything from stocks to bonds to currencies outperforming investor expectations.
Central banks across developing nations had been growing somewhat optimistic about global economic resilience and receding price pressures.
But with no clear endgame a couple of weeks into the war, and with Iran's new leader vowing to keep the crucial Strait of Hormuz passage for global shipping shut, investors are wavering.
This has, for now, short-circuited a monetary easing push among emerging market central banks and cast doubt on whether the emerging market rally can resume.
"We maintain a cautious stance on emerging market assets due to significant headwinds," Citi analyst Luis Costa wrote, adding: "it will all depend on the longevity of this energy price squeeze."
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