Emerging market bond fund outflows hit $70 billion in 2022

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Investors withdrew a record $70 billion from emerging market bond funds this year, a sign that soaring interest rates in advanced economies and the strong dollar are adding pressure on developing countries.

Investors withdrew $4.2 billion from emerging market bond funds in the past week alone, according to JPMorgan analysis of data from EPFR Global, a fund flow monitor – bringing annual outflows to the highest level since the US bank began recording data in 2005.

The investor flight underscores how emerging markets are facing growing risks from soaring interest rates in developed markets, making typically high yields on emerging debt less attractive. The greenback’s significant gains also make it more expensive for emerging countries to service dollar-denominated debt and increase the cost of importing raw materials, the price of which is often denominated in US currency.

JPMorgan in September raised its forecast for emerging market bond outflows in 2022 to $80 billion, after previously forecasting $55 billion.

Milo Gunasinghe, emerging markets strategist at JPMorgan, described outflows as relentless, with just seven weeks of net inflows since the start of the year. They were also wide, with investors withdrawing money from funds holding both local and foreign currency bonds.

Rather than weighing the relative risks of currency exposure, investors are simply exiting. This marks a sharp turnaround: flows have been positive in both types of bond funds for each of the previous six years, at a combined average of more than $50 billion a year.

Gunasinghe said rate hikes and bond sales by central banks, which have significantly reduced liquidity flowing through global markets, “will keep the bar high for inflows for the foreseeable future.”

Shilan Shah, senior economist at Capital Economics, said cross-border flows from non-resident investors to the limited group of emerging markets that provide timely data tell a similar story: bond flows have been consistently negative this year, while stock flows swirled. , turning strongly negative over the past few weeks.

Many analysts saw an improving outlook for emerging assets earlier this year as economies began to emerge from the pandemic. Russia’s war in Ukraine derailed this, although some commodity exporters benefited from a sharp rise in prices – until global inflation and the rising dollar turned against them. Some analysts, again, see an opportunity in today’s heavily discounted valuations.

But Shah, like Gunasinghe, expects capital outflows to persist for the rest of the year. Slower global growth and global trade, with an associated decline in investor risk appetite, will keep headwinds ahead, he said.

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