Sell in May? They certainly did in emerging markets.
But unlike in the old adage, they are likely to sell in June and July too if investment returns in the once-hot sector keep getting slammed by moves in US bond yields and the dollar.
Emerging currencies have crashed to multi-month and even multi-year lows against the dollar in the recent frantic selloff, with emerging bond funds suffering their first weekly outflow in a year, according to data from EPFR Global as reported by Reuters.
The Boston-based fund tracker reports redemptions of $224mn from emerging debt in the week to May 29, while equities lost $2.9bn, their biggest outflow since end-2011.
Memories of 1994 (when the Fed hiked rates and emerging markets suffered a lot) have been stirred by recent talk that signs of a US economic recovery could induce the Federal Reserve to scale back its money-printing, risking a repeat of the market bloodbath that followed Alan Greenspan’s decision to start tightening policy almost 20 years ago.
As years of rock-bottom US yields draw to a close, emerging markets, at least temporarily, may be victims of the Fed’s success in pulling the US economy out of its funk.
During these years they have enjoyed an investment bonanza. EPFR data shows over $46bn flowing to emerging stock and bond funds since January, after almost $90bn last year.
But 10-year US Treasury yields, considered the risk-free benchmark for most assets, rose 40 basis points in May while the greenback surged.
And while some weak US economic data has dampened expectations the Fed will end, or taper, money-printing early, the emerging markets selloff shows no sign of abating.
Put simply, an investor comparing 10-year US yields at 2.2% with the 5.2% offered by, say, Chile, might well, given the skew of currency risk, opt for the former.
Many also fear this round of US recovery, possibly fuelled by re-industrialisation rather than relying on emerging market imports, may not be bullish for the developing world.
The boom in recent years has meanwhile slashed yields on emerging debt. JP Morgan’s main GBI-EM index yielded a record low 5.2% in early May, 120 bps less than a year earlier.
The panic over US rates blew emerging dollar bond spreads almost 20 bps wider over Treasuries in May to bring 2013 returns to minus 3%. Local debt yields meanwhile rose 50 bps, with returns tipping into the red in the past week.
Emerging equities slumped more than 3%, their biggest monthly loss in a year, while currencies, which typically make up a significant portion of investors’ annual return, have also slipped.
According to UBS, an equally weighted basket of 20 emerging market currencies that it tracks has lost 3.7% to the dollar this year, the bulk of the weakening coming in May.
These may seem like big moves. But while negative return is a powerful sell signal for funds, most big investors are still hanging in there, with losses so far down to so-called hot money exiting or a pickup in currency hedging, analysts say.
