Global markets got knockout blow last week from emerging market ETFs

Sharp outflows from exchange-traded funds (ETFs) investing in emerging markets (EMs) accentuated the market fall last week. Many global markets saw their worst weekly setback since the 2008 global financial crisis.

The MSCI EM index dropped 7.2 per cent last week as investors, spooked by the impact of the coronavirus outbreak on the economy and corporate earnings, pulled out from risky assets.

According to the data compiled by Bloomberg, US-listed ETFs that buy EM stocks and bonds saw redemption to the tune of $3.73 million — most in a more than a year. Of this, nearly $3.4 billion was from equities.

ETFs, which invest in Hong Kong-listed Chinese stocks, saw outflows of nearly $1.4 billion — most among EMs. Indian markets witnessed the second-worst outflows at $416 million, 18 times more than the previous week.

US-listed EM ETFs form one of the many categories of overseas investors that invest in the domestic markets. There are also domestic ETFs and those listed outside the US. Further, there are actively-managed funds, which invest in the markets based on money managers’ discretion.

The total foreign portfolio investor (FPI) pullout from the domestic market, according to the Sebi data, was $1.8 billion. Therefore, a fourth of the outflows were from the US-based EM ETF.

Market players say global ETFs have become big market influencers. Before the coronavirus scare, EM ETFs had witnessed huge inflows aided by the benign monetary stance adopted by global central banks. 

This had partly helped the domestic markets scale record highs in mid-January, despite the sluggish economic data and weak third-quarter corporate numbers.

ETF flows will be sensitive to the spread and impact of coronavirus, experts say. If the redemption pressure continues, it would be difficult to stem the losses in the domestic market, they say. On the contrary, inflows into ETFs could resume if central banks signal that they are willing to ease their monetary policies, experts add.

Following last week’s pullout, inflows into EM ETFs have dropped to $570 million.