Billions in Redemptions Bad News for Emerging Markets

June 19, 2006, 1:00 a.m. EDT 1 Min Read

After leading the markets, Brazil and China have recently taken a back seat to old faithful blue chips, according to the Associated Press.

Markets in Latin America and Eastern Europe have plunged in recent weeks, and U.S. investors are moving away from them.

Since May 8, the 25-country Morgan Stanley Capital International emerging markets index has slipped 20%.

Last Monday, the Colombian stock market dropped 10.5%, only to fall another 8.9% Tuesday, marking its biggest dive ever.

More than half of global fund managers surveyed by Merrill Lynch said they expect the global economy to get weaker over the next 12 months. The worldwide dive comes from the combined effects of rising interest rates and local sell-offs that have intimidated investors, analysts say.

"For the past six months, pretty much every scrap of good news, and then some, was priced into these markets," said Cameron Brandt, global markets research director for Emerging Portfolio Fund Research in Cambridge, Mass.

Between Jan. 1, 2003 and May 8, 2006, the MSCI emerging markets index increased more than threefold. But in week ending June 7, investors pulled $8.5 billion from the $248 billion emerging market equity sector, according to Emerging Portfolio Fund Research.

For the sake of comparison, during the first quarter of this year, investors poured $23 billion into emerging markets. That's as much as they contributed during all of 2005, and four times the 2004 inflows.

For security, investors are looking to the home front, said Lipper Senior Research Analyst Tom Roseen. "Investors who have been overweight emerging markets and Japanese stocks must be feeling the heat," said David Bowers, chief global investment strategist for Merrill Lynch. "The question is whether the domestic investment case for these regions can withstand the extended period of tighter monetary policy."

The staff of Money Management Executive ("MME") has prepared these capsule summaries based on reports published by the news sources to which they are attributed. Those news sources are not associated with MME, and have not prepared, sponsored, endorsed, or approved these summaries.