Emerging markets hit by worst sell-off in decades
Central bank rate hikes, geopolitical risks and slowing growth are fueling an investor rush for safety
Ibrahim Al-TarikMay 9, 2025
Emerging market debt suffers its worst losses in nearly three decades. The reasons for this are rising interest rates worldwide, slowing growth and the war in Ukraine.
The benchmark index for dollar-denominated emerging market government bonds, the JPMorgan EMBI Global Diversified, has posted a total return of around minus 15 percent so far in 2022, making it the worst start to the year since 1994. The decline was only slightly mitigated by the broad recovery in global markets over the past few days, which ended a seven-week losing streak in Wall Street stocks.
Almost $36 billion has flown out of emerging market mutual funds and exchange-traded bond funds year-to-date, according to EPFR; The development on the stock markets has also reversed since the beginning of the month.
"It's certainly the worst start I can remember for the entire asset class and I've been involved with emerging markets for more than 25 years," said Brett Diment, Abrdn's head of global emerging market debt.
Developing countries have been hit hard by the coronavirus pandemic, which has weighed on their public finances. Soaring inflation, slowing global growth, and the geopolitical and financial dislocations caused by Russia's war in Ukraine have added to economic pressures on them. Investment outflows threaten to exacerbate their problems by tightening liquidity.
David Hauner, head of EM strategy and economics at Bank of America Global Research, said he expects the situation to get worse.
"The big problem is that inflation is so high in the world and monetary policymakers continue to be surprised by the level of inflation," he said. "That means further monetary tightening, and central banks will continue to do so until something collapses - the economy or the market."
Everyone is turning away from the whole EM complex as an asset class and towards safer assets
Yerlan Syzdykov, Global Head of Emerging Markets at Amundi, said higher yields in developed markets like the US - fueled by central bank rate hikes - are driving EM bonds make it less attractive. "Best case you will make zero, worst case you will lose money [this year]," he said.
Hauner said rate hikes in the major developed economies are not necessarily bad for EM assets when accompanied by economic growth. "We have a big stagflation problem and central banks are raising interest rates to combat rampant inflation in some countries like the US. It's a very unhealthy backdrop for emerging markets.
China, the world's largest emerging market, has been the biggest seller Concerns
about geopolitical risks, including the possibility of China invading Taiwan after Russia invaded Ukraine, were compounded by the economic slowdown as the government imposed draconian restrictions in pursuit of its zero interest rate policy, said Jonathan Fortun, an economist at the Institute of International Finance, which monitors cross-border portfolio flows into emerging markets.In
the past two years, Chinese assets have received large so-called passive inflows after the country was included in global indices, meaning fund managers trying to track their benchmarks a automatically bought Chinese stocks and bonds.
This year, however, those inflows have reversed, with more than $13 billion leaving Chinese bonds and more than $5 billion leaving Chinese stocks in March and April, according to the IIF.
"We expect negative outflows from China for the rest of the year," Fortun said. "This is a very big deal."
The fund managers failed to redeploy some of the money withdrawn from China into other EM assets, leading to widespread withdrawal: "Everyone is turning away from the whole EM complex as an asset class and moving towards safer assets."
The shock in commodity prices caused by the war in Ukraine has added to the strain on many developing countries, which depend on imports to meet their food and energy needs.
However, this has also resulted in some winners among commodity exporters. Diment von Abrdn pointed out that local currency bonds in the JPMorgan GBI-EM index have produced a total return of minus 10 percent in dollar terms so far this year, with wide variation across countries.
Bonds from Hungary, which is close to war and dependent on Russian energy imports, have lost 18 percent in the year to date. Bonds for Brazil, a major exporter of industrial and food commodities, are up 16 percent in dollar terms.
Diment said that EM debt valuations "seem to be looking pretty attractive now" and that Abrdn has seen net inflows into its EM debt funds so far this year.
Bank of America's Hauner, however, argued that the bottom will not be reached until central banks shift their focus from fighting inflation to supporting growth. "That could happen sometime in the autumn but I don't feel like we're there yet," he said.
Syzdykov said it depended on whether the surge in inflation dies down and the global economy returns to a balance between low inflation and low interest rates. The alternative would be for the US to fall into recession next year, which would further weigh on global growth and further boost emerging market yields, he warned.
