Plunge in oil puts most markets through the wringer

The first net outflow of foreign money in 18 months hit emerging markets in December as oil prices fell, risk aversion grew and investors anticipated a US Federal Reserve rate hike, the Institute of International Finance says.

Stocks tumbled in December amid a rapid decline in oil prices, moving the Dubai index dramatically into the negative territory.

The equity index closed up 12 per cent by the end of the year, Abu Dhabi’s index finished the year with a loss of 5.56 per cent.

Traded value on the Abu Dhabi Securities Exchange tends to be lower than that of Dubai’s. One of the key reasons is that shares of the market bellwether, Etisalat, are not open to foreigners.

Meanwhile, the first net outflow of foreign money in 18 months hit emerging markets in December as oil prices fell, risk aversion grew and investors anticipated a US Federal Reserve rate hike, the Institute of International Finance (IIF) says.

Portfolio outflows totalled US$11.5bn with bond investment down $7.8bn and $3.7 billion withdrawn from stocks, the Washington-based finance industry body said in its monthly report.

This is the sharpest outflow since June 2013, when markets were caught off guard by Fed comments hinting at the prospect of winding down the supply of cheap money that investors had ploughed into higher-yielding emerging assets. “Investor sentiment towards emerging markets appears to have taken a significant turn for the worse in the last few weeks,” says the IIF economist Robin Koepke, the lead author of the report.

“The weakness in flows is likely to reflect a general increase in risk aversion in the context of the Russian currency crisis and the remarkable decline in oil prices.”

Emerging Europe was hardest hit, followed by Africa/Middle East and Latin America. Only Asia recorded small overall inflows, with foreign purchases of Indian bonds offsetting a retrenchment in equity flows.

A majority of economists in a Reuters poll expected the Fed to raise interest rates from near zero in the second quarter of next year, in turn making it more costly for emerging nations to raise funds in dollar-denominated debt.

An almost 50 per cent drop in crude prices last year inflicted much pain on oil and gas exporter Russia and the rouble also lost about 43 per cent against the dollar.

The IIF estimates total private capital flows to emerging markets probably reached $1.16 trillion in 2014 and will be at $1.15tn this year.

Separately, emerging Asian currencies resumed a depreciation trend early in 2015 as the dollar hit a near nine-year high against a basket of major currencies, helped by the easier monetary policies of other central banks.

The Indonesian rupiah slipped a two-week low on Friday as the government’s decision to cut its 2015 fuel subsidy costs failed to cheer investors on the dollar’s strength and amid a slowing domestic economy.

The Singapore dollar fell to a near four and a half year low after the city-state’s economic growth in the fourth quarter was far worse than expectations.

South Korea’s won slid as a weaker yen increased risk of intervention by the foreign exchange authorities.

“It is hard to find any reason to sell the dollar,” said Jeong My-young, Samsung Futures’ research head in Seoul. “China’s data is also sluggish, so there is no factor to add long Asia positions in advance,” added Mr Jeong, referring to data showing China’s factory activity sputtered in December.

Last year, emerging Asian currencies fell on expectations of the Fed’s interest rate hikes in 2015 with a solid economy. By contrast, China’s economy kept slowing, darkening the outlook for exports of other Asian countries.

Malaysia’s ringgit was the worst performing emerging Asian currency in 2014 on sliding oil prices, while a weaker yen hurt north-east Asian units – the won and the Taiwan dollar.

* with agencies

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