Rising US interest rates and a stronger dollar have pressured EM asset prices since the second quarter began, while intensifying trade protectionism has also hit sentiment. The MSCI EM equity index remains more than 12 per cent below its peak in March.
Max Gokhman, head of asset allocation at Pacific Life said: “The biggest force remains the trade tariffs turning from rhetoric to action.”
Within EM, Turkish assets suffered after President Recep Tayyip Erdogan predicted a fall in interest rates on Wednesday, heralding a new record low in the lira and pushing bond and equity prices lower.
In contrast, emerging market bond funds recorded their first gains since the end of May, with $744m of new cash flowing in as bond yields have risen. The yield on a broad Bloomberg emerging market bond index has risen 1.2 per cent this year to 5.67 per cent, but moderated this week as prices rose.
“I think this is a bit of a yield story,” said Jim Sarni, managing principal at Payden & Rygel. “You have hit some thresholds that are getting people’s attention just because the nominal yields are so high.”
US equity funds also fared better, adding $4.3bn, weathering concerns over trade ahead of a second-quarter earnings season expected to show strong company profit and revenue growth.
“Right now sentiment is skewing more to the fear side but it’s not extreme,” said Mr Gokhman. “Tariffs are a concern for the US, however I think what markets are going to be looking at now are earnings over the next month.”
European equity funds also saw continued withdrawals, with $4.2bn this week — the 18th straight week of outflows.