
How the Fed's Potential Rate Hike is Stealing China's Christmas
Emerging-market funds are seeing a fresh round of investor redemptions as speculation mounts that the U.S. Federal Reserve will raise interest rates this year, reducing the appeal of higher-yielding assets from riskier countries such as China and Brazil.
Investors pulled $5.5 billion from emerging-market funds in the first 10 days of November, wiping out net inflows of $1.2 billion in October, according to the Institute of International Finance. The reversal extends a wave of redemptions in the third quarter, when investors pulled $49 billion from emerging-market funds, the most since the financial crisis in 2008.
The renewed selling coincides with a downturn in the benchmark MSCI Emerging Markets stock index (EEM) - Get Report , which has lost about 3% this month following a 7% rally in October. More investors and banks are betting the U.S. Federal Reserve is getting closer to its first hike since 2006, after Fed Chair Janet Yellen said this month that an increase was a "live possibility."
"You have a Fed that is suddenly back to raising rates, and China fundamentals haven't really turned around a lot," said Stuart Quint, senior investment manager and international strategist for Brinker Capital, a Berwyn, Pa.-based firm that oversees $17.7 billion. "Plus you still have the structural issues over lack of growth in many, if not most, emerging markets, with negative headwinds for foreign exchange."
Goldman Sachs said in a report on Wednesday that China's economy grew by just 5% in October, based on the New York-based bank's proprietary activity index, well below the official third-quarter gross domestic product reading of 6.9%.
The Brazilian central bank said its economic activity index fell by 6.2% in September on a year-over-year basis, the most on record, following a 4.5% contraction in August. The latest figure portends a "deeper and longer economic recession" for the country, Bank of America said in a report. "Low confidence prevents investment from regaining momentum," according to the analysts.
Falling commodity prices have been a further drag on emerging markets, implying lower exports for many of the countries that are big raw-materials producers. Benchmark U.S. oil futures dipped below $40 on Thursday, after climbing to about $50 in October.
According to the finance institute, large institutional fund flows into emerging markets have "turned sharply negative in recent weeks." Much of the withdrawals were concentrated in funds whose assets are denominated in emerging-market currencies, reflecting investor expectations that the dollar will strengthen as the Fed raises rates, the institute said.
Speculation that rates will start to rise next month gained more momentum on Wednesday when the Fed released records of its October monetary policy committee meeting. Those minutes described a consensus among members that "it may well become appropriate" to start raising interest rates in December, "provided that unanticipated shocks do not adversely affect the economic outlook and that incoming data support the expectation that labor market conditions will continue to improve."








