In an almost textbook fashion, a stronger dollar and rising US rates has triggered a broad emerging market sell-off and surge in volatility. However, somewhat atypically there is little evidence so far of foreign capital bolting for the exit, despite the gradual repricing of EM credit risk. We have used daily data on ETF flows into emerging markets to gauge the extent to which there has been an outflow of portfolio capital. As the chart below shows, the drawdown from the 12-month trailing peak pales in comparison to previous episodes of EM capital flight. This time the series is dominated by equity flows, so we have also separated out flows to fixed-income ETFs, which paints a similar picture.

With the exception of Argentina and Turkey, which have suffered most severely at the hands of higher US rates, EM risk repricing is still in its infancy. We have turned increasingly cautious of emerging markets and warn that continued weak EM sentiment may lead to a capitulation from EM investors that has hitherto not happened.

(Click on image to enlarge.)

Source: Bloomberg, Macrobond and Variant Perception