By Tom Arnold
LONDON (Reuters) - Large outflows from emerging market investments towards the end of September point to a big "risk-off" shift brewing, Institute of International Finance economists say.
Emerging markets sucked in $2.1 billion in portfolio flows in a month marked by fresh market turmoil, uncertainty arising from the U.S. election, a rejuvenated dollar and uncertainty about the recovery from the coronavirus, the IIF said -- more than the $700 million seen in August.
But it said high frequency outflows from emerging markets towards the end of the month were almost as big as in the 2013 "taper tantrum" or during 2015 when the Chinese yuan was devalued.
IIF said it saw growing differentiation in flows to emerging markets, with some markets seeing outflows that continue to build, and an increasing divergence between debt and equity flows.
After a huge exodus from the asset class at the height of market turmoil caused by the pandemic in March, flows to emerging markets had been recovering somewhat as investor confidence in developing countries' handling of the crisis improved.
(Graphic: Outflows point to "risk-off" brewing in emerging markets -IIF https://fingfx.thomsonreuters.com/gfx/mkt/xlbvgjdropq/Capture.PNG)
But emerging market hard currency debt funds saw their first week of outflows since early July in the week ending Sept. 23, with $414 million exiting, ING said in a separate note, referencing EPFR Global data.
Emerging market debt overall saw inflows of $1.2 billion during the week, thanks to local currency debt funds, which reported a very strong week, ING said.
"We believe that the flow picture is set to remain weak, with EM ETFs so far reporting outflows this week," the bank's analysts wrote in the note.
"With the U.S. elections approaching and rising COVID-19 figures, market sentiment remains fragile and we are set for more volatility."
After five straight months of positive returns, EM credit was in September hit by the first down month since March, the bank noted.
During September, debt posted an inflow of $12.9 billion, IIF data showed, while equities registered outflows of $10.8 billion, of which $4 billion left Chinese stocks.
Regionally, emerging Europe and Latin America saw inflows of $1.1 billion and $1.6 billion respectively, with all the remaining regions seeing outflows.
(Editing by Catherine Evans, Kirsten Donovan)