As more investors utilize exchange traded funds and other fund products to access developing economies, emerging market stocks have become increasingly volatile.
According to the Bank of International Settlements, the presence of asset managers in emerging markets had grown “considerably” and that “the concentrated use of benchmarks and the directional co-movement of investor flows can generate correlated investment patterns that may create one-sided markets and exacerbate price fluctuations,” reports John Authers for Financial Times.
Moreover, BIS economist point to evidence over the past two years that reveal “investor flows to asset managers and [emerging market]asset prices have reinforced each other’s movements.”
The “fragile five” economies with high current account deficits, which include Brazil, India, Indonesia, Turkey and South Africa, stand out in the emerging market space, experiencing broad swings due to investor sentiment.
Fragile-five emerging market ETFs, including iShares MSCI Brazil Capped ETF (NYSEArca: EWZ), iShares MSCI Indonesia ETF (NYSEArca: EIDO), WisdomTree India Earnings Fund (NYSEArca: EPI), iShares MSCI South Africa ETF (NYSEArca: EZA) and iShares MSCI Turkey ETF (NYSEArca: TUR), all experienced heavy selling pressure as their currencies quickly depreciated on Fed speculation.
The five markets plunged on the Federal Reserve’s tapering talk in May of 2013, and from then until February 2014, the group’s total underperformance of emerging markets was 21.1%. After Janet Yellen was sworn in as the Fed’s chairwoman, the fragile five outperformed the broader emerging markets by 21.3%.