(June 18, 2013) – Some retail investors may be fleeing from developing economies that seem to be slowing down, but their institutional counterparts have not been so flippant in their affection, research has shown.
Analysts at Bank of America Merrill Lynch said at its mid-year briefing on June 17 that, to date, there had been no outflows from the asset class from institutional investors.
“Pension funds and insurance companies still need to make payments and there are no yields anywhere else at the moment,” analysts said. “These investors can still get incremental yields from these economies—they may have slowed down, but growth rates still outpace developed markets. However investors need to be aware of the volatility within these asset classes.”
Volatility is one problem over which these economies have had little control in recent weeks, as markets have reacted to the potential “taper” by the US Federal Reserve as it has hinted at unwinding its quantitative easing programme.
Figures from data monitor EPFR showed $8 billion was withdrawn from (predominantly retail) emerging market bond and equity funds last week—the highest amount since the third quarter of 2011.
These withdrawals have a knock-on effect for investors remaining in the sector.
Bank of America Merrill Lynch analysts said there were relatively few dealers in emerging market credit, which meant there had been very little trading until the recent sell-off. By April, the asset class had been performing well due to the flows being mainly in one direction—into these burgeoning economies. In recent weeks, hasty sell-offs have resulted in increased volatility and market plunges.
“As worries about the flow of liquidity facilitated by the central banks slowing began to heat up over the past few weeks, markets have become increasingly volatile,” said Melissa Brown, senior director of applied research at risk model and portfolio construction specialists Axioma.
“Concerns are also reflected in increasing correlations between assets; investors anticipating a slowdown driven by central bank action may also believe the impact will be broad-based, and are therefore punishing many stocks rather than a few.”
Brown pointed out that volatility was not just driven by investors moving out of an asset class or market, but rather that they could not make up their minds where to stay put.
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