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Billions Flow Out of Foreign Funds

June 01, 2006|From Times Staff Reports and Bloomberg News

Investment funds that own emerging-market stocks suffered a net cash outflow of $5 billion in the seven days ended May 24, the biggest in two years, as some investors fled higher-risk markets on worries about the global economy.

The cash outflow, reported Wednesday by Emerging Portfolio Fund Research, amounted to 1.7% of the funds' total assets of $285 billion, the firm said. The data track emerging-market funds worldwide.

Shares in markets including Russia, Brazil and India plummeted in May after stellar gains in the first four months of the year. Stocks worldwide have been rocked by fears that higher interest rates could slow the global economy.

The Morgan Stanley Capital International emerging markets index, which tracks shares of 26 developing countries, plunged 10.8% in May. That was the worst monthly drop since an 11% decline in September 2002, when President Bush, in a speech at the United Nations, foreshadowed the U.S. invasion of Iraq.

Russia's RTS stock index fell 11.8% last month, Brazil's Bovespa index tumbled 9.5%, India's Sensex index lost 13.6% and Mexico's IPC index slid 9.5%.

Even so, many emerging markets still have large gains year to date, after soaring in the first four months. The Russian market is up 29.8% this year, Brazil is up 9.2%, India is up 10.6% and Mexico is up 4.9%.

By contrast, the U.S. Standard & Poor's 500 index is up 1.8% this year after losing 3.1% in May.

Some analysts warn that selling could continue in emerging markets as investors lock in some of the gains they have racked up on paper over the last three years, a strong period for many of the markets as the global economy has expanded.

"The reversal in global liquidity away from emerging markets will last longer than a few weeks," said Parameswara Krishnan, who manages about $150 million at DNB Nor Asset Management in Chennai, India.

But market bulls say the fundamental outlook for many developing nations remains strong. The Indian government on Wednesday said that economy grew at a 9.3% annualized rate in the first quarter.

"All stock markets, at some point, go through a correction," said Kamal Nath, India's trade minister, at a briefing in Paris on Wednesday. "This is nothing to be alarmed about. India is a very resilient economy now."

Cameron Brandt, research director at Emerging Portfolio Fund Research in Cambridge, Mass., said the "acid test" for emerging-market stocks would come in two weeks or so. If investors don't begin to return to those markets at about that point, it could signal that the stocks are headed for another downdraft, he said.

China's stock markets have bucked the downtrend in other emerging markets. The Shanghai exchange's composite stock index jumped 14% in May and is up 41% this year. Chinese stock trading is dominated by the country's own investors, and isn't subject to the large foreign cash inflows and outflows of many other emerging markets.

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