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Investors Continue to Withdraw from Emerging Markets

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Outflows continue

During the week ending December 4, emerging market equities (EEM) saw total outflows of $658 million, compared to outflows of $372 million during the previous week. The region saw outflows for the ninth-consecutive week.

Investors withdrew funds from emerging markets, including Brazil and Russia, due to slowing growth and lower industrial production in the region. China’s falling manufacturing activity and Brazil’s and Russia’s contractions in 3Q15 led investors to withdraw funds from these emerging markets.

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Valuations not driving flows

Some select markets are currently priced at lower valuations, but investors are looking for signs of recovery before deploying funds. China’s manufacturing contraction is expected to stabilize in 2H16 if strong growth in retail can be realized and if services can attract investments for the next phase. Overall, China and India are poised to attract funds over the long run on their fundamentals.

Investments in emerging markets account for ~12% of worldwide investments in mutual funds and ETFs. Emerging economy offerings from mutual funds and ETFs are expected to rise in upcoming quarters. Reform initiatives by major countries to further open economies, remove currency restrictions, and deploy funds are helping emerging market economies to attract more funds.

Emerging market ETFs

Meanwhile, asset managers have increased their offerings of ETFs that include emerging market equities and debt. Asset managers including BlackRock (BLK), JPMorgan Chase (JPM), State Street (STT), and Deutsche Bank (DB) now offer investment products in emerging markets. Net investments for ETFs linked to performing economies should rise in the future.

Major ETFs such as the iShares Emerging Markets ETF (IEMG), the iShares Core MSCI Emerging Markets ETF (EEM), the WisdomTree India Earnings ETF (EPI), the iShares MSCI India ETF (INDA), and the iShares MSCI Emerging Markets Minimum Volatility ETF (EEMV) all attracted positive investment flows totaling $124 million during the week ending December 4, 2015.

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