US fund investors are wavering on one of their favourite bets of the last year, walloping emerging-market stocks and hunkering down in short-term bonds. Funds offered in the United States but invested in shares in emerging markets recorded $870 million in withdrawals, the most since November 2016, during the week ended May 9, research service Lipper said on Thursday.
The risk-averse move in emerging markets was paired with a rush into short-term debt as US President Donald Trump pulled out of an international nuclear deal with Iran, raising the risk of conflict in the Middle East and casting uncertainty over global oil supplies. "People decided to park some of that money," said Tom Roseen, head of research services for Thomson Reuters Lipper.
Emerging markets have been on their hottest run since their relief rally in 2009 after the apex of the global financial crisis. Over the last 16 months, the funds have pulled in nearly $67 billion, according to Lipper. Rising oil prices should be helping the developing markets, which include some of the biggest crude producers, yet May is on pace to deliver their first month of withdrawals of 2018.
Recent days brought news including Argentina's move to seek financing from the International Monetary Fund to calm volatile markets. That adds to pressures including the trade conflict between the United States and China. US Federal Reserve chairman Jerome Powell on Tuesday said interest rate hikes the Fed has planned may not pose as big a risk for emerging-market economies as many have thought.
Rising rates make bonds more attractive to foreign buyers, who sell assets in other currencies to buy dollar-denominated Treasuries. That helps lift the greenback, making it harder for emerging market countries to repay debts or import goods priced in dollars. The trade-weighted US currency is up more than 3 percent over the last month.
Rising rates have helped short-dated debt buyers. The notes now offer plumper yields and in general lack the interest-rate sensitivity of longer-dated bonds. Investors can also use the bonds to hide from greater volatility in stocks. Corporate bond mutual funds and exchange-traded funds (ETFs) focused on the short-term segment of the market pulled in $1.1 billion during the week, the most new cash for the category since September 2017, Lipper data showed.
Investors are also rewarding smaller US-listed companies seen as sheltered from trade disputes and benefiting from corporate tax cuts. Small-cap funds tracked by Lipper pulled in $1.2 billion during the week, a fifth straight week of inflows.
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