The Strategist

Investors are leaving emerging markets as oil prices are falling

04/28/2020 - 02:58

Last week, international investors withdrew the maximum amount of funds over five years ($ 7.3 billion) from the markets of developing countries. The risks of a recession in the global economy, as well as falling oil prices, are forcing investors to massively reduce investments in risky assets. At the same time, investments in protective assets — money market funds and precious metals — are growing.

International investors are actively reducing their presence in emerging markets (EM), according to Emerging Portfolio Fund Research (EPFR). The Bank of America data (taking into account EPFR data) for the week ending April 22 shows that funds whose investment policy is focused on EM have lost $ 7.3 billion. This result is ten times bigger than a week ago and is a record since the end of August 2015 of the year. Then, due to fears of a slowdown in the Chinese economy, investors withdrew more than $ 10.1 billion from the funds of developing countries. Since mid-February 2020, almost $ 25 billion has been withdrawn.

The flight from risky assets began amid the spread of coronavirus outside of China. The authorities of many countries were forced to introduce strict quarantine measures, which resulted in the shutdown of most of the business. Analysts expect a wider recession than in 2008. Only the joint actions of financial regulators of developed countries to pump up economies with money partially stabilized the situation. Thus, the current increase in outflows from funds of developing countries continues to indicate a high level of fear in the market associated with fears of negative consequences for the economies of both developed and developing countries from the impact of restrictive measures. 

The collapse in prices on the world oil market that occurred last week also fueled nervousness of investors.

The cost of Texas WTI oil for the first time in history has become negative. Despite the technical nature of the fall, European oil was also under pressure. According to Reuters, over the course of the week the price of the nearest Brent oil contract fell 23% to $ 21.4 per barrel. The negative dynamics of oil has affected the markets for risky assets, especially in the markets of countries with developing economies, many of which are net oil exporters. Bank of America noted that reaching oil prices lows increases the solvency risk for emerging economies.