And, it would seem growing worries about global growth, mixed with developed market dithering about when exactly to raise interest rates has seem many, especially those invested in emerging markets, take to their heels.
Indeed, according to the latest Bank of America Merrill Lynch Flow Show note, the past week has seen the $8.3bn come out of equities, the largest outflow in 15 weeks, and in the opposite direction, a seventh straight week of inflows into government bond funds. Even gold has had a positive week, which goes against the trend for the year.
But it is emerging markets, dragged down by worries about the likely path of Chinese growth, the surging price of the dollar and cratering commodity prices, that have been hardest hit.
While the dollar has been on the rise for months, and commodity prices have been falling for longer than that, it is the concerns about China that seem to have broken the camel’s back.
As Chris Iggo, CIO of fixed income at Axa Investment Managers, puts it, it is the narrative around China that has changed the most, from one of unstoppable growth above 10% to one in which growth has halved, the stock market bubble has burst, the current account surplus is nowhere near as high as it was in the glory days of the last decade, reserves are declining and the central bank recently sanctioned a 3% adjustment in the value of the currency.
EM equities have now dropped by more than 10% in 2015, BAML pointed out, with battered EM currencies weakening by a similar magnitude. Brent oil prices slipped further this week and now sit at $45/barrel, the post-2009 low reached in January.
It added: “Regional financial stress is climbing: our EM financial stress index has matched last year’s peak, and is now edging towards the highest levels since the peak of the euro area crisis in 2011.”
But, while China is a major part of the EM malaise there are other contributers including excessive credit growth encouraged by low global rates as well as poor macro-economic management, Iggo said.
And, this means that there is mostly bad news in the markets at the moment.
Indeed, he added: “The combination of the China slowdown, the emerging market meltdown and fears of the Fed and the Bank of England (BoE) starting the period of interest rate normalisation is one that has caused stock indices to slide and credit spreads to widen.
“Market moves are compounded by the poor liquidity of August and the lack of ’good news‘. Even when we get stronger data from the US – like the recent positive news on the housing market – this just reinforces fears that the Fed will raise rates soon.”
