The Emerging-Market Bloom Is Off The Rose

Emerging-market equities, as an asset class, is turning in the worst monthly performance since last May, losing about 2.4% so far. The MSCI Emerging Market (free float) Index is off 5% from the high recorded on May 9 and is about 6.5% below the year's peak reached in early January.

A Shock
On top of the low measured inflation in the U.S., despite QE, the sell-off in gold, despite the claims that paper money has been debased, the weakness of emerging-market equities is a shock to many investors and observers.

Three forces have weighed on emerging market equities most recently: the slowing of China, weaker commodity prices and the backing up of U.S. yields (~60 bp in the 10-year note) weighed sentiment. The important point here is that external variables more than domestic reforms seems to be the main driver of flows. More generally, foreign equity buyers have seemed more attracted to the U.S. and Japanese shares than emerging markets.

The Financial Times reports today that, Southeast Asian equity markets are on tear. Ripped on the U.S. Federal Reserve's easy money, the markets keep rising and the cash keeps coming in. This is misleading and it seems to recognize the hyperbole. Citing data from EPFR, it notes that 3/4 of the money (~$20 bln) that has gone into non-Japanese Asian equity funds since the Fed began QE3, occurred in December 2012 and January 2013.

Thailand's Market
The MSCI Asia-Pacific Index excluding Japan is off 5.85% from the month's high and closed today at its lowest level since mid-April. The two bourses that the FT highlights are Thailand and the Philippines. Yet foreigners have been net sellers of Thai shares this year, divesting themselves of about $735 mln worth. More than half of these sales took place this week (~$488 ln). Thailand's stock market is off about 1% this month, after losing about 3% over the past five sessions.

Foreign demand for Philippine shares has held better. Non-residents have purchased about $1.46 bln worth of Philippine equities this year, even though they sold about $111 mln so far this week. The Philippines Stock Exchange is up almost 20% year-to-date, making it the second-best performer in the region behind Tokyo (despite the foreign selling Thailand's market is up 13.6% year-to-date).

Taiwan Inflows
Outside of Japan and India, Taiwan has seen the largest foreign capital inflows into its equity market this year. More than half of the $4.4 bln that foreign investors have plucked down on Taiwan shares this year has come in here in May (~$2.4 bln). Yet Taiwan's Taiex is up 7% year-to-date and a meager 1.8% over he past month.

Latan American bourses have fared worse. ILF, the ETF which tracks the S&P Latam 40 Index, has fallen 11% this year and is off 3.2% since the early May peak. Mexico's Bolsa is off 3.8% this month, going into today's session, which is tantamount to half the year's decline. The weakening economic data apparently trumps the surprise 50 bp rate cut earlier this year (and anticipation of additional rate cuts).

Wrong-Way Policy
Brazil's Bovespa was essentially flat going into yesterday's session when it lost about 2.5% ahead of the anticipated rate hike by the central bank after the markets closed (a 50 bp hike was delivered, while many expected only a 25 bp hike). That monetary policy is going in the opposite direction of most other countries has not been lost on investors and the 10% decline in the Bovespa this year makes it among the worst performing markets (though Peru's equity market is off 22% this year).