Emerging Markets Brace for Capital Flight Amid Echo of 2013
U.S. one-hundred dollar, ten-dollar, five-dollar and one-dollar banknotes. (Photographer: Paul Yeung/Bloomberg)

Emerging Markets Brace for Capital Flight Amid Echo of 2013

Emerging markets are bracing for an exodus of funds as a surge in Treasury yields evokes memories of the taper tantrum of 2013.

After rallying at the start of 2021, developing-nation assets have slumped during the past two days as U.S. Treasury yields jumped to the highest level in more than a year, sounding a warning about the outlook for interest rates and inflation. The MSCI Emerging Market Index of shares tumbled as much as 3% on Friday, while the South African rand and Mexican peso have both fallen nearly 3% from Wednesday’s close.

Emerging Markets Brace for Capital Flight Amid Echo of 2013

Emerging-market assets are falling out of favor as expectations for tighter global monetary policy and a revival of inflation reduce the relative appeal of risk assets. This week’s surge in U.S. yields is reminding many of the taper tantrum, when the Federal Reserve’s announcement that it would start winding back its quantitative-easing policy led to a spike in bond yields around the world.

“It appears the market is pricing in a taper tantrum whatever the Fed says,” said Alvin T. Tan, head of Asia foreign-exchange strategy at RBC Capital Markets in Hong Kong. “Like in 2013, it is generally negative for EM FX,” with the Indonesian rupiah, rand, lira and Brazilian real among the most vulnerable currencies this time, he said.

India’s rupee was the biggest loser in emerging markets on Friday, sliding more than 1.4% while the South Korean won slumped 1.4%. The Mexican peso tumbled 2.3% on Thursday, its worst day in five months, and extended its losses Friday. Stock indexes in South Korea, Hong Kong and Taiwan all slid about 3%.

The rout in emerging markets comes after the asset class was earlier ranked among the most favored trades for this year. Two-thirds of investors said developing-nation stocks they would be the top performers for 2021, according to a survey of fund managers published by Bank of America Corp. in January.

‘Tipping Point’

“We could be at a tipping point where the rise in yields could become more problematic for the broader market,” said Sim Moh Siong, a currency strategist at Bank of Singapore Ltd. “It’s never good news for countries with current-account deficits. The rising yields mean the cost of external financing has become higher.”

The jump in borrowing costs may create a challenge for many developing economies as they seek to finance funds spent combatting the impact of the pandemic. A number of emerging-market nations have already struggled with demand at bond sales.

Indonesia said it is considering scaling back its financial needs after missed its goals at its last two auctions. India is also considering borrowing less to ease the pressure on its debt market, people with knowledge of the matter said.

Bond Buying

Emerging-market authorities may be forced to increase bond-buying programs to put a lid on yields, according to Mitul Kotecha, chief emerging-markets Asia and Europe strategist at TD Securities in Singapore.

“They will not want to see a premature rally in yields, especially as growth across many EMs is still fragile,” he said. “Higher market volatility, pressure on yield differentials and a slide in growth and momentum stocks will likely hurt EM assets.”

Still, Kotecha said capital flight is unlikely to be as bad as 2013 and will probably be a short-term phenomenon. “The Fed is still nowhere near tapering or hiking and ultimately this should calm nerves,” he said. “Also the reason for higher yields is that recovery is increasingly taking shape. That’s actually good news for EM.”

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