A reversal of sentiment towards China and the looming interest rate rise in the US have sent emerging market assets plummeting.
The region’s equities entered a technical correction last week, with the MSCI Emerging Markets index falling by more than 10 per cent since its April 13 peak.
The emerging market bond index JPM GBI-EM Global Diversified Composite has suffered its biggest decline since its trough after the so-called ‘taper tantrum’ in 2013 and is now 8.3 per cent lower than it was in early April.
Investors have fled the region in droves recently, with data firm EPFR Global reporting the biggest weekly outflow from emerging market equities in the seven days to June 11 since the financial crisis.
The data shows the majority of the $9.3bn (£6bn) outflow came from Chinese equity funds, at $7.1bn, but money left generalist funds as well.
Jake Robbins, manager of the Premier Global Alpha Growth fund, said “most emerging market countries have had difficulties and are facing the prospect of a US rate rise, which will hurt their performance”.
He said once investors started selling out of the region’s assets, it could create a negative trend as “it doesn’t really take much selling pressure, it’s not the deepest market”.
Mr Robbins said he had been reducing his emerging market exposure this year and was not looking to buy back in until the “negative headwinds” had passed.
A major catalyst for the region’s underperformance has been the reversal of sentiment towards Chinese equities, which have also entered correction territory following a huge rally throughout 2014 and early this year.
Justin Oliver, deputy chief investment officer at Canaccord Genuity Wealth Management, said the sell-off in China and emerging markets might not be confined to just that region.
He warned the “all but inevitable” correction in China’s stockmarket, given its liquidity-fuelled rally at a time when the country’s economy had gone through a slowdown, could introduce “greater volatility into global stockmarkets as a whole”.
Both emerging market bonds and equities have also suffered due to the looming prospect of a US interest rate rise, which could happen in September.
Monetary tightening in the US has historically led to money leaving emerging markets and moving back to developed markets and some investors may have already decided to pre-empt that move.
A US rate increase is also likely to lead to a stronger dollar. Aviva Investors multi-asset manager Nick Samouilhan said if that happened then emerging markets “would suffer a lot of damage because of foreign exchange headwinds”.
Mr Samouilhan said he was “substantially underweight emerging market equities” within his funds and has “sold out completely from emerging market local debt positions”.
“People had been waiting for emerging markets to start falling and we are starting to see them get hurt,” he added.
However, Schroders’ Simon Webber, manager of the Global Alpha Plus fund, said he had begun to dip his toes into emerging market equities, where he said he was “finding some good growth stories that are unappreciated”.