Investors are spooked - money is flowing out of emerging market funds following volatile returns and increased uncertainty about US monetary policy.
While the power shift east to China is a foregone long-term conclusion, for now in the investment world it is still the case that when America sneezes, the rest of the world catches a cold.
And so - as Jan Dehn, head of research at specialist emerging market investors Ashmore, said funds are flowing out of EMs because of an increase in uncertainty about the outlook for US monetary policy.
"Global uncertainty always causes some segments of the investor base to sell, notably hedge funds, banks, and temporary visitors, such as cross-over investors," she said.
"The same thing happened when sub-prime erupted, US treasuries were downgraded, Greece blew up, and when Spanish banks were in trouble. In each of these cases, emerging markets asset prices moved a long way out of line with fundamental risks, ultimately creating buying opportunities."
As a result, both Indian and Indonesian currencies have plummeted. India's rupee fell to an all-time low against the dollar while Indonesia's rupiah declined to its lowest level against the dollar since April 2009.
Manish Bhatia, manager of the Schroder ISF Indian Equities Fund said that back in May, when talks of the US tapering first started, he noted that India and Indonesia were the two countries within Asia most at risk of foreign capital flight. Bhatia said he expects India and Indonesia to continue to experience macroeconomic challenges over the next year.
“The US Fed's tapering will also impact the rest of the region and we expect volatility to continue but overall, we maintain our commitment to the long-term fundamentals of the region's growth,” he said.
“Other Asian markets, including fellow South East Asia heavyweights Thailand and the Philippines, will continue to drive growth, aided by infrastructure programmes and growing domestic consumption.”
In a video interview last week, Morningstar analyst Oliver Kettlewell said that the combination of social unrest in regions such as Syria, Egypt Brazil and Turkey alongside economic forecasts being downgraded have caused emerging market investors to panic.
But Dehn reiterated that there was nothing for investors to worry about – that only a small number of countries are facing conventional cyclical adjustments.
Emerging market guru Mark Mobius of Franklin Templeton said that it was all about finding quality companies amongst the rubble. “We don't have any particular sectors or regions where there are best opportunities,” Mobius said. “We are finding opportunities everywhere – it is about taking a bottom up approach and concentrating on the quality of the stocks rather than the indices they sit in.”
Mobius did say that unlike some of his peers he was bullish about the prospects for China.
“The growth potential of China is excellent – upwards of 7% growth is very good for an economy which is the second largest in the world.”
Coutts Global Markets weekly report also revealed the investment bank had upgraded its outlook for Chinese equities from “negative” to “neutral”.
The report read: “With the government showing greater commitment to expand its spending and recent data coming in above expectations, we have upgraded our outlook on Chinese equities from negative to neutral. The better outlook was reinforced this past week when the HSBC purchasing managers’ index (PMI) of corporate confidence unexpectedly topped the 50 mark, signalling an expansion.”
Emma Wall is Web Editor for Morningstar.co.uk.
