Newsmakers : Emerging Markets Face Savage Reversal Of Funds Flows



Capon: Asia’s funds are drying up fast.

The credit crunch has shattered a lot of illusions about the soundness of the global financial system, and another theory that has been challenged is that of “decoupling,” whereby emerging markets were purported to be less dependent on the United States for growth.

As billions were wiped off the value of companies comprising the leading share indexes in developed markets in recent weeks, emerging market indexes have not escaped unscathed. According to research firm State Street Global Markets (SSGM), six of the 20 worst days ever for the MSCI Emerging Market index were recorded from September 17 to October 17 of this year. “No other period comes close to similar volatility,” says Andrew Capon, vice president in the research division of SSGM in London. He adds that only three of the index’s worst 20 days were recorded during the 1997 Asian currency crisis.

While the MSCI EAFE index of developed equity markets fell 42% year-to-date in mid-October, State Street says the emerging market index was down 50%, and the BRIC (Brazil, Russia, India and China) index had fallen 57%. The volatility of emerging markets has also been accompanied by a savage reversal of flows, says Capon. While investment flows “remain broadly positive” for certain emerging European markets, he says monthly flows into emerging Asia are at record lows.

The large stockpiles of FX reserves amassed in Asia since the 1997 crisis are also drying up, says Capon, as banks look to defend their currencies. He says that in the third quarter FX reserves fell by $19 billion, $16 billion and $15 billion respectively in South Korea, Malaysia and India.

Anita Hawser