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Forex

Investors flee the Fragile Five for the PIIGS

NEW YORK -- Funds specializing in emerging country stocks are losing their investors. Fast. Blame the sharp declines in the value of certain currencies -- a trend that took hold at the beginning of this year.

     The outflow of money from funds investing in emerging-market stocks actually began in the middle of last year, albeit at a slower pace, when the U.S. Federal Reserve first spread word that it would be putting less money into its monthly bond-purchasing program.

     Now that the Fed is being less generous, investors have plenty of other reasons to play it safe with their cash: China's economic slowdown, the devaluation of currencies in Argentina and Venezuela, political unrest in the Ukraine and fears of terrorism striking the Sochi Olympics among them.

     About 6,500 funds with a combined $1 trillion and investing in emerging nation stocks saw a net outflow of $6.3 billion in the week through Jan. 29, according to data provider EPFR Global of the U.S. It was the biggest weekly walk-back in three years and marked the 14th consecutive week of outflows.

     Of the most recent outflow, $5 billion was pulled out by institutional investors.

     But it has not become obvious that retail investors have joined their institutional brethren en masse. In fact, retail investors seeking growth potential and high yields appear to still be putting their money into funds specializing in emerging markets. If these investors rush to join the pullback, emerging-market stocks could fall further.

     There are two groups that bear watching: the so-called Fragile Five -- Brazil, Turkey, South Africa, India and Indonesia -- and the PIIGS -- Portugal, Italy, Ireland, Greece and Spain.

     The first group is seen as at the mercy of economies with weak financial foundations. The second club, despite its current sunny disposition, had been at the center of Europe's sovereign-debt crisis.

     According to EPFR Global, the Fragile Five are seeing rapid outflows of money while the PIIGS are seeing inflows. Investors have become less willing to buy stocks in emerging countries, where they had been chasing growth potential with boatloads of cash.

     The outflow from Fragile Five stock markets has accelerated the selling of their currencies. According to U.S. economist Ed Yardeni, the value of the South African rand fell 32.4% from the beginning of 2013 to this past Feb. 3. Turkey's lira dropped 27.1%, the Indonesian rupiah lost 25.5%, the Brazilian real tanked 18.4% and the Indian rupee slid 14.3% during the same period.

     But at least one expert feels the potential of another currency crisis like the one that swept through parts of Asia in 1997 are slim.

     "Compared to 1998, emerging markets hold over $7 trillion more in hard currency reserves to cushion themselves from market volatility," said Peter Marber, head of emerging market investments at Loomis, Sayles & Company. For most emerging markets, the problems today are nothing like the problems of the mid-1990s, he added. "Very few countries are near default, and those that may be are relatively small."

     According to Marber, investors will give countries that do not promote economic reforms the cold shoulder, regardless of whether they are developed or emerging.

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