Turkey Ripples Hit Korea as Record Money-Market Funds Pulled

(Bloomberg) -- Turkey’s economic troubles are reverberating in a market for short-term investors all the way across the Eurasian continent in South Korea.

Investors pulled 8.7 trillion won ($7.8 billion) from mutual funds dealing in short-term debt and other cash-like instruments on Friday, the biggest single-day outflow ever from such products, according to the latest data from the Korea Financial Investment Association. While some of that may have been down to month-end withdrawals, such funds had been snapping up securities backed by deposits at Middle East banks in recent months.

“Investors seem to have gotten nervous about the situation in Turkey,” said Kim Ki-myung, a credit analyst at Korea Investment & Securities Co. in Seoul.

The pullback by Korean investors underscores the broad impact of Turkey’s troubles on global markets. Korea’s money market funds have been trying to earn extra yield by betting on deposits at Middle Eastern banks, especially those from Qatar, but the lenders’ exposure to Turkey has started to cause concern among those investors.

Some local asset management firms including DB Asset Management Co., Alpha Asset Management and Heungkuk Asset Management restricted investors from withdrawing their invested funds from some MMFs from last week, citing the high volume of withdrawals.

Sales of securities backed by Middle Eastern bank deposits jumped 23 percent in the first half to 10.3 trillion won, data from Korea Investors Service show. Money market funds as a whole came to about 106 trillion won as end-June.

Kim at Korea Investment & Securities said that jitters about Middle Eastern deposits may prove temporary, and that while Qatari lenders have exposure to Turkey, they should be able to absorb any worsening of the situation.

Korean investors may be overreacting to overseas factors after getting burned by the China Energy Reserve & Chemicals Group Co. default in May, according to SK Securities Co.

“This has more to do with market sentiment than credit risk,” Kim Sun-ju, a credit analyst at SK Securities in Seoul, wrote in a note dated Monday.

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