Emerging market equity funds witnessed their biggest exodus in almost two years as concerns over the U.S. Federal Reserve cutting back on monetary stimulus and deteriorating growth prospects led investors to exit risk assets.
The funds saw a net outflow of $5 billion in the week ended June 5, according to fund flow data provider EPFR. BRIC [Brazil, Russia, India, China] nation funds reported the largest outflows, led by China at $1.48 billion, Brazil at $530 million and Russia at $360 million. Developed market funds, by contrast, saw $1.4 billion worth of redemptions for the week, led by the U.S., EPFR data showed Friday.
"The weakness that you see in EM [emerging markets] is not going to be with us for 3-4 months [only]. This is trend weakness because emerging markets have lost their growth model. Exports aren't doing very well, current accounts surpluses are coming under strain, deficits are rising," Bhanu Baweja, global head of EM fixed income & forex research at UBS, told CNBC on Friday.
"We should expect pretty low returns out here [from emerging markets]," he added.
Sell Emerging Markets in May and Maybe June and July Too
The money flowing out of China funds was the largest amount since February 2011. The Shanghai Composite, Asia's laggard index, has struggled to gain traction in recent months, weighed down by the uncertain growth outlook for the world's second largest economy. It is down 2.6 percent year to date.
However, fellow BRIC markets have fared much worse than China. Brazil's benchmark Bovespa Index has lost 13 percent since the start of the year, while Russia's RTS Index is down 15 percent over the same period.
The MSCI Emerging Markets Index is down 7 percent year to date, far underperforming the MSCI All Country World Index which is up almost 7 percent.
Last week, European bank Societe Generale declared that the end of the emerging market bull run had arrived. "This is the return of a top-down market, mainly reflecting the surfacing of the global liquidity retrenchment as the major driving force. This is also the end of the GEM [Global Emerging Market] bull market," said Societe Generale's head of emerging market strategy, Benoît Anne, in research note.
Why the Emerging Market Bull Run Is Over
The Fed's bond buying program has led ample liquidity into emerging markets in search for higher returns, but a paring back of stimulus is expected to heavily dampen appetite for risky assets.
"Emerging market equity selling is likely to accelerate. I think we're looking at a very problematic future for any kind of investment. Where do you go if the bond market goes bad, and the equity market goes bad? You go into cash. I think we will see a lot of people fleeing into cash, or cash like instruments in the coming months," said Uwe Parpart, managing director at Reorient Financial Markets.
Wild Swings? Emerging Currencies Have It the Worst
Weakness in emerging markets has not been limited to equities, currencies have been subject to heavy selling in recent weeks, with the Mexican Peso and Brazilian Real down 7 and 6 percent, respectively, against the U.S. dollar, over the past month.
By CNBC's Ansuya Harjani