First, investors poured money into emerging markets with promises of dramatic returns.
Now, after a lack of the desired results, investors have been yanking their money back out – with over USD 6.3 billion being taken from emerging market equity funds last week alone.
This is the biggest outflow of dollars on record, resulting in collapsing currencies and failing stock markets; which lead to the sacrificing of real economies by central banks to try and save their battered exchange rates.
A number of factors have spurred on the developments – such as rising interest rates in America, political turmoil in many emerging markets, and fears of a slowdown in China.
Yet one of the biggest factors has been the Federal Reserve’s tapering off its bond purchases – part of an effort to stimulate the USA’s growth whilst keeping interest rates low.
In addition, a number of developed economies have expressed concern that some emerging market economies have not reformed in line with their growth – making them unstable.
The rapid sell-off gathered pace last month when Argentina gave up its efforts to maintain the value of the Argentine peso.
Central banks in South Africa, India and Turkey then jacked up their interest rates to try and curb the outflows.
Together with Brazil and Indonesia, these countries constitute the ‘Fragile Five.’
To finance imports, all of the Fragile Five depend on foreign investments.
Adding to this instability is the fact that they are all due to hold elections in 2014 – which heralds increasing levels of political instability and a lack of focus on reforms.
This political risk has likely driven some of the recent currency trends.
Whilst not a part of the Fragile Five, emerging economy Thailand also serves as a reminder in the dangers of investing in emerging markets as it faces violent riots, political unrest, and no clear exit strategy from its troubles.
As such, since November foreign investors have been taking their funds out of Thai equities at an alarming rate.
Still, despite the far-reaching mass exodus, a few emerging markets have managed to remain afloat.
Bucking the trend
The world’s second biggest economy has attracted USD 363 million to its equity funds as renminbi flows offset decreases of investments in dollars and euros.
Secondly, after becoming the unwilling owner of one of the most battered emerging market currencies, Turkey’s dramatic decision to aggressively raise its rates by 4.75% last week appears to have been a smart move – as its equity funds take in new money for the sixth week in a row.
As a long term fix however, it is unclear whether the move will satisfy the world’s international investors – and repair the reputation of the country’s central bank.