Analysis: Emerging-market investors get picky with Fed set to taper

Wed Sep 11, 2013 1:07am EDT
 
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By Steven C. Johnson and Julie Haviv

NEW YORK (Reuters) - Investors bracing for the U.S. Federal Reserve to wind down its monetary stimulus have fled emerging markets in recent months, and while the impact of slow capital flows is likely to be felt for some time, some countries will fare much better than others.

The U.S. central bank is expected to begin trimming its massive $85 billion bond-buying program as early as next week. That will mean fewer Fed-created dollars sloshing around the global financial system.

Markets like Brazil and India, which must import capital to finance spending, will feel the squeeze. Mexico and South Korea, to name two, are less dependent and won't get hit as hard.

As a consequence investors hungry for the higher yields offered by emerging market stocks and bonds can no longer sink their money in the developing world indiscriminately, experts say. They will have to become much more selective.

For years, "many emerging markets have just had to sit back and watch the capital flow in. They haven't had to try very hard to attract it," said Morgan Stanley strategist James Lord. "Now they're going to have to work harder. That means reforms."

The MSCI Emerging Market Index fell some 12 percent between May and September. That was the worst four-month stretch in more than a year for the stock index, which did regain some ground in recent sessions. All told, investors have yanked $3.3 billion out of emerging bond funds since late May, according to Lipper, a Thomson Reuters company.

So far the pain has been most acute in places such as India, Turkey and Brazil. Those countries and others are also struggling with rising inflation and sluggish growth.

Other markets, while not untouched, have suffered less.   Continued...

 
A general view of the U.S. Federal Reserve building as the morning sky breaks over Washington, July 31, 2013. REUTERS/Jonathan Ernst