When it comes to market returns and the flow of capital, the strength of the US dollar is the second most important factor, behind the overall health of the global economy, according to econometric models conducted by Murat Ulgen, Global Head of Emerging Markets Research, HSBC.
“So when you have a global growth environment that is weak or weakening, combined with a strong dollar, you will see significant outflows out of fixed income,” he said, highlighting that USD60 billion had left bond funds so far this year.
But the recent outflows will unlikely turn into a rout on the scale of the Taper Tantrum in 2013 – a period of market turmoil that sparked global investors to pull money out of the so-called “Fragile Five”, including Brazil, India, Indonesia, South Africa, and Turkey.
Mr. Ulgen highlighted a number of reasons to believe that some emerging markets are in a much stronger position than in the past. In the current stretch of market volatility, many central banks in emerging markets have already hiked rates aggressively. They have healthier external balance sheets, which is advantageous when liquidity is being withdrawn, and better current account balances, reducing their funding requirements.