A strengthening US dollar has contributed to a reversal of fortunes for emerging market equity ETFs after a strong run, with Turkey and Latin America among those hit the hardest by the recent sell-off.
Turkish stock ETFs are down around 10% over the month to 10 May, according to TrackInsight data, while Mexican Stock ETFs have fallen 5.3% and Indonesian Stock ETFs are 11% lower over the same period.
Meanwhile, flows into emerging stocks ETFs are starting to reflect the market turmoil, despite performance of the overall sector remaining positive over the month to date. Since the beginning of May, EM Stock ETFs have seen a total of €1.5 billion in outflows, (see chart below).
As an example, one of the largest products in the sector, the €8.6 billion iShares Core MSCI EM IMI UCITS ETF – USD, has experienced its first redemptions since August 2015, albeit these outflows are very small.
Rising US dollar
This reversal of fortunes for the sector has been attributed by experts to the recent strength of the US dollar, which increases borrowing costs for emerging markets, particularly affecting those countries with high amounts of debt denominated in the US currency.
The reasons for the greenback’s rise have been twofold over recent weeks. Firstly, the continued monetary policy tightening by the Federal Reserve is boosting the dollar, as it limits the currency’s liquidity and makes it more attractive for foreign investors.
Secondly, US President Donald Trump’s latest decision to pull out of the nuclear agreement with Iran means the US will be importing less Iranian oil, and producing more oil domestically. Along with pushing oil prices to three-year highs, the news has also put upward pressure on the greenback.
As a result, the US Dollar Index Spot has risen to its highest point so far this year, sitting at 92.54, according to Bloomberg.
European debt luring investors away from EMD
Another negative for emerging markets is the political turmoil in Europe, where Italy is grappling with the prospect of the formation of a Eurosceptic government by the anti-establishment Five Star Movement and the right-wing Lega party.
These fears are putting downward pressure on the euro, which has fallen back from highs of $1.2510 in February to its current value of $1.1943. This, in turn, is making European debt look more attractive thN emerging market debt, and luring investors away.
Over the past month to 10 May, emerging bonds ETFs have seen cumulated outflows of €503 million, TrackInsight data shows.
