Emerging Markets Tank In July, ETFs Follow Suit

EM equities fell over 7 percent last month as stock market volatility continues; ETF investors continue to opt out

Editor, etf.com Europe
Reviewed by: Rachael Revesz
Edited by: Rachael Revesz

Terrorist attacks in India, southern Turkey and more protests in Tiananmen Square were just a small part of the picture for emerging markets (EM) in July, which fell over 7 percent last month, and exchange traded fund (ETF) flows have followed suit.

In equities, EM funds saw net redemptions and in fixed income, EM funds dropped $99 million, mainly from USD currency denominated debt, according to Macquarie Group. The bad news shows no sign of relief for outflows in EM in 2015 overall: up to 30 June, EM equity ETF investors redeemed $15.9 billion.

Fund managers at HSBC warned in May that EM ETFs had liquidity constraints and limited ability to track their indexes, and were therefore not the “easy” pick for extra yield. And in April a survey from Legg Mason revealed that global investors were planning to shun EM after a difficult 12 months in Brazil and Russia, and ETF outflows since then have stuck true to their word.

Only five out of 23 EM markets made positive gains in July, according to data from S&P Dow Jones Indices. Hungary, Czech Republic, India, Morocco and the United Arab Emirates posted gains in July ranging between 4.8 percent and 1.5 percent respectively.

India has continued to buoy investor hopes with promise of further reform and being a net importer of cheap oil, but Garima Sharma, an analyst at Global Risk Insights, said this week that investors should not ignore the mounting geo-political tensions. ETF investors poured $91.2 million out of India last week alone.

“[…] despite the changed external outlook, little will be achieved if vulnerable areas back home continue to remain centres of socio-economic discontent […]” she said, referring to the recent attack in the Dina Nagar village of Punjab near the border of Pakistan.

The worst two performers in the EM category in July, as measured by the S&P Global Broad Market Index, were Brazil, which fell 12.5 percent and saw over $8 million worth of global ETF redemptions last week and China, which lost 12 percent over the month, and was hit by more than $133 million ETF outflows over the last eight days.

For those investors who are scared away from EM when China heads for a down market, Adam Wolfe, Asia strategist at the Macro Research Board, said the Chinese economy is rebalancing, not crashing. He wrote in a research note on 3 August that investors are overly fixated on growth indicators, but ignore the positive shift towards services. He projects 7 percent growth this year.

“Sentiment toward China is overly pessimistic because investors have not yet embraced the economic rebalancing that has already occurred,” he said. “As local government investment projects accelerate in the coming months, so will the indicators that most investors track, easing fears of a hard landing.”

Read more on how to select emerging market exposure here.


Rachael Revesz joined etf.com in August 2013 as staff writer. Previously an investment reporter at Citywire, she has a background in writing content for retail financial advisors and has covered a wide range of subjects in finance. Revesz studied journalism at PMA Media, which has since merged with the Press Association. She also holds a B.A. in modern languages from Durham University, as well as CF1 and CF2 financial planning certificates from the CII.