Emerging market equity funds took another hit last week as fund outflows extended to four straight weeks. This drought of fund inflows is the longest streak in the past seven months according to Informa Financial Intelligence (EPFR). At the time many believed the U.S. Federal Reserve (the Fed) was serious about continuing rate hikes, I had warned this was mere posturing at the time, and equity markets took a dive. Since then, the Fed, the European Central Bank (ECB), the Central Bank of China, and the Bank of Japan have reiterated their commitment to keeping interest rates accommodative. These central banks have been forced to cut rates or suspend hikes at the minimum because of what they see as a serious slowdown in growth. Will this continue and what does this mean for investors and countries around the world?
The recent turmoil in Europe, a manufacturing slowdown in Germany, protests in France, and the continued uncertainty surrounding Brexit continues to weigh on European equity funds. Continued uncertainty, the one thing markets find most disconcerting, will force continued redemptions in funds that invest in European equities. Turkey was also not spared by this exodus of capital as it recorded a 37-week record in redemptions in funds that invested in Turkish equities, according to Informa Financial Intelligence's latest report. Turkish equities join Germany, France, Britain and many other countries whose equity markets have entered a "risk-off" phase. Turkey's equity funds saw redemptions of nearly 6 percent following the uncertainty surrounding the municipal elections held in its largest city.
While instances of election irregularities have made the race tighter than it already was, the incumbent Justice and Development Party's (AK Party) candidate is on track to lose to challenger Ekrem İmamoğlu barring a full recount or a repeat of the election. It is this uncertainty that investors are fearful of. While the AK Party has exposed electoral irregularities in several districts, the total number of votes that have been rectified have yet to put Binali Yıldırım, the AK Party candidate, over the top. Will there be a full recount? Will there be a new election in Istanbul? These issues are still unresolved and investors will continue to sit on the sidelines with their investments until a resolution is reached.
The EPFR also reports that Russia is experiencing major outflows from its equity funds as investors are unable to decipher how serious Vladimir Putin is about a continued presence in Venezuela. The turmoil in Venezuela notwithstanding, Latin American investments are actually up in the last week as nervous equity investors look for a harbor to safely park their funds. With the abrupt firing of President Trump's Secretary of Homeland Security, Kirstjen Nielsen, the Cabinet secretary in charge of ensuring safety along the U.S. border with Mexico, U.S. relations with Latin America have also entered a new term. Will Trump continue to vilify the region in an attempt to drum up support ahead of his upcoming presidential election or will he declare victory in his fight for a wall and get back to doing business with what should be America's most natural trading partner?
I foresee continued weakness in equity markets globally as sectors see increased slowdowns. Money market and bond funds will continue to rally especially as investors may expect a return to near zero percent interest rates by the end of 2020 and into the long term.
