Investors make first sharp retreat from emerging markets since June 2013

LONDON: 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 Federal Reserve rate hike, the Institute of International Finance said.

Portfolio outflows totalled US$11.5bil with bond investment down US$7.8bil and US$3.7bil withdrawn from stocks, the Washington-based finance industry body said in its monthly report.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," said IIF economist Robin Koepke, lead author of the report published late on Tuesday.

"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.

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.

A 50% drop in crude prices this year has inflicted much pain on oil and gas exporter Russia and the rouble has lost around 43% against the dollar.

In October, the IIF estimated that total private capital flows to emerging markets would likely reach US$1.162tril in 2014 and US$1.158tril next year. – Reuters