Emerging Stocks’ Emerging Problems; India Shows How the Emerging-Market Selloff May Have Only Begun
August 24, 2013 Leave a comment
August 23, 2013, 5:28 a.m. ET
Emerging Stocks’ Emerging Problems
India Shows How the Emerging-Market Selloff May Have Only Begun
Emerging-market stocks have taken a thumping lately, and it could get a whole lot worse if foreign investors hasten their retreat. The MSCI Emerging Markets index is down 12.6% for the year, but it appears a lot of the selloff has been driven by local players. Foreigners have been slow to get out of emerging-market stocks. In fact, for most of the year they have been putting more money to work, according to EPFR, including inflows into stock funds much of the past two months.For emerging markets, most of the pain has been in bonds and currencies. But this last week, foreigners began selling stocks in earnest, $12.3 billion worth.
Take India. Foreign investors have been basically propping up the stock market, having piled in a net $12 billion this year, according to regulatory data. Without them, Mumbai’s benchmark index, down 5% for the year, would have fallen more.
As outsiders keep accumulating stocks, their ownership of India’s top 500 stocks hit a record high of 21.7% on June 30, says Citi. And that percentage has likely risen further since then.
But foreigners’ mood could be changing. Investors were spooked when Indian officials imposed capital controls on residents late last Wednesday. Between Monday and Thursday this week, the stock market had foreign net outflows of $517 million.
Another worry is the turmoil from the tumbling rupee is feeding through to tightening credit and slower growth. That has pushed locals to sell. In the past, according to flow data, foreign investors tended to pull money out only after they see stocks fall.
A looming problem for emerging markets is that the Federal Reserve hasn’t even started curtailing its bond buying yet. When it does, the outflows of the past few months could accelerate as investors abandon risky emerging-market assets for the higher safe yields of Treasurys.
India’s broader financial system is still protected by its foreign-exchange reserves and relatively low levels of foreign debt, so a full-blown crisis might not be in the offing. But as the Fed’s bond purchases fall off, the beating that Indian stocks take may pick up.
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