GEMs funds flows:EM flows momentum and asset performance worsen after FOMC

Challenging global conditions for EM will likely persist in the coming weeks. The external settingcontinues to worsen as the Fed has turned hawkish, UST 10yr yield is elevated, the USD is ona strengthening bias and cross-asset volatility is high. This will likely keep market expectationsabout EM central bank monetary policy actions on the neutral hawkish side, worsen EMfinancial conditions and cap EM growth prospects. However, commodity prices are showingresilience to USD strength, mainly metals and oil, and should support those net commodityexporters with promising fundamental stories. Overall, we maintain a cautious and selectiveapproach to EM.

    Outflow from EM funds and inflows to DM funds continued in the week ended 14 December.

    In EM, net outflows from EM bond funds, mainly from Thailand and Korea, shadowed inflows toEM equities, mostly into Russia. In DM, strong gains in US equity funds more thancompensated for withdrawals from European (Germany, France and Italy) and US bond funds.

    HSBC’s early signalling system indicates weakness in demand for EM bonds but less so forequities (p. 14). HSBC’s EM fund flows momentum (p. 5), dispersion indicators (p. 8) and retailrather than institutional demand (p. 13) suggest the appetite for EM risk is still tempered. Also,outflows from EM ETF bond funds continued for the seventh consecutive week, both EXD andLCD, while ETF equity funds managed to attract investors for the third week in a row. Finally,daily financial account portfolio flows to eight countries show flows into equities, mainly SouthKorea and Brazil, and bonds (seven countries), mostly South Korea and Indonesia (p. 15).

    Since the Fed meeting, EM equities have fallen 2.1% (8.1% y-t-d), dragged down by CzechRepublic, China and Hungary. LCD declined 1.7% (8.1% y-t-d), driven by EM FX (-1.4%, -0.5%y-o-y), mainly ZAR, RUB and BRL. EXD fell 0.5% (9.3% y-t-d), due to Venezuela, South Africaand the Philippines. EM corporate debt dropped 0.4% (10.7% y-t-d), on the back of HY (-0.4%,18% y-t-d) and IG (-0.4%, 6.6% y-t-d).