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Rattled investors withdrew $1.4bn from emerging markets within a week

In 2018 through August 13, the Turkish lira lost 45% of its value against the dollar feeding fears of a wider emerging market crisis.
posted onAugust 17, 2018

Emering Markets (EM) portfolio flows have slumped in recent days amid spillover from Turkey, according to the Institute of International Finance.

The Washington-based institution in a new report said that investors have pulled $1.3 billion out of emerging-market stocks in the last week and $100 million from bonds. 
“Turbulence, amid heightened tensions between the U.S. and Turkey, has clearly weighed on investor appetitive for emerging market assets,” the IIF noted.

Turkey has been thrown into crisis mode over the past week, roiling markets, after US President Donald Trump announced via Twitter a doubling of steel and aluminium tariffs on the country, sending the value of the lira into free-fall, as Washington pushes Ankara to release U.S. pastor Andrew Brunson, who is detained in Turkey since 2016. 

In response to President Donald Trump’s imposition of stringent sanctions, Turkey announced boycott of US electronic devices, including Apple iPhones and on Wednesday, doubled tariffs on 22 types of produce and goods  imported from the US,  including cars, tobacco, alcohol, cosmetics, rice and coal.  

“The plunge in the lira, which began in May, now looks certain to push the Turkish economy into recession, and it may well trigger a banking crisis,” Andrew Kenningham, chief global economist at Capital Economics told Reuters. “This would be another blow for EMs as an asset class.” 

South Africa and China were hit the hardest with the exodus of investment money this week amounting to $600 million and $500 million, respectively, the IFF said.

India has also turned negative this week seeing money leave. Meanwhile, other EM Asian countries including Malaysia, Indonesia, Korea, Philippines and Vietnam saw moderate outflows. In contrast, Brazil, Thailand and Qatar saw net inflows.

“The impact of market strains is likely to be most acute for countries with relatively large external financing needs,” the IIF said. 

MSCI index

(Source: Thomson Reuters Datastream)

Emerging stocks are still set for their worst weekly sell off  since February, down 3.5 percent according to Reuters. Chinese mainland shares fell for a fifth straight day while the yuan was on course for a record 10th straight week of losses, down 0.5 percent for the week. South Africa's rand weakened 1.4 percent and was on track for a near 6 percent weekly decline.

Emerging market borrowing costs also continued to climb, with the JPMorgan EMBI hard currency sovereign debt index at 365 basis points, its highest in a week. 

MSCI's benchmark emerging stocks index which tracks 24 countries extended its slump since January to 20 percent on Wednesday. It ended the week on a slightly calmer note however, up 0.2 percent, and snapping a seven-day losing streak. 

The wider selloff which picked up pace over the last week has not been as severe as when U.S.-China trade tensions first erupted, the IIF added.

The Institute of International Finance is an association of the financial industry, with close to 450 members from 70 countries. IF members include commercial and investment banks, asset managers, insurance companies, sovereign wealth funds, hedge funds, central banks and development banks. 

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