A slide in Asian equities since the start of 2011 that gained momentum this week on fears over inflation is not a rush by investors to exit emerging markets, but a paring of exposure to economies seen with most to lose. Sellers have targeted stocks in India, China and Indonesia, worried authorities are being too slow to tighten policy in these fast-emerging economies producing much of the world's economic growth.
However, the funds are not necessarily leaving the region, a relief to policymakers who worry that last's year record inflows could become outflows that destabilise their economies.
Markets in Malaysia and South Korea, where the central banks are seen to have a better handle on inflation following rates rises, are strong. Indeed, just this week Korea's stock market hit a record high. The MSCI stocks index of Asian stocks outside of Japan posted this week its worst weekly performance in nearly two months and is down just over 1 percent this month.
Indonesia and India, two investor favourites of recent years, are leading the decline, down 8.7 percent and 7.3 percent respectively since the start of the year.
China's stock market is down a more moderate 3.3 percent this year, but it slumped 14 percent in 2010 while other emerging markets in the region roared ahead.
To be sure, Asia's markets are ripe for profit taking anyhow. Between the end of 2008 and 2010, India's benchmark stock index rose more than 110 percent and Indonesia's nearly tripled; well ahead of gains of 39 percent in the S&P 500 and 15.5 percent in Tokyo.
Latin American stocks are also seeing a selloff this year after surging last year. They fell to a three-week low on Thursday after Brazil raised interest rates and on concern China may have to do the same following strong economic data.
Gerardo Sienra, who is in equity sales at Intercam in Mexico City, said Latin American markets could be facing a steeper selloff after closing 2010 strongly. For foreign investors, returns on their emerging markets investments were amplified by the gains in emerging market currencies, which had sparked fears of capital controls and currency wars.
Now, with the dollar posting some gains and confidence growing that the US economy may have turned a corner, investors may be taking the opportunity to take profits and reinvest elsewhere.
Bolstering the view that money may be leaving emerging markets is the relative outperformance of US and European markets so far this year. In contrast to the fall this year in the MSCI index of Asia ex-Japan, the Dow Jones industrial average is up 2.1 percent, having rallied steadily since August, and the FTSEurofirst 300 is up a similar amount.
India finds itself considered as being behind the inflation curve even though it has raised rates six times in 2010. It is expected to rate rates again on Tuesday.
Food prices rose an annual 15.5 percent in the year to January 8, but the root causes - bad weather damaging crops, poor infrastructure and rising global prices - can't be fixed by interest rates. Indonesian and Philippine bonds took a hit on Friday, with bond prices falling and credit default swap spreads, a measure of risk, widening. But corporate bonds found buyers, showing investors were not avoiding risk but were being selective.
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