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Investors pull funds from emerging market ETFs for the first time in four weeks

June 22, 2022by Nicholas Kabaso
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Local Market Commentary

  • The aggressive monetary policy tightening by major central banks triggered a significant outflow from bond markets last week as traders priced for a steep cycle of interest rate hikes as inflation across the world continues to run hot. Recall that the Federal Reserve delivered a 75bps rate hike, the biggest increase in almost three decades. The aggressive monetary policy tightening from the Fed and other major central banks continued to drive investors out of bonds last week.
  • This is evident in the latest weekly emerging market exchange traded funds flow data published by Bloomberg on Monday. Specifically, outflows from US-listed emerging market ETFs totalled $534mn in the week ending June 17, bringing to an end four weeks of inflows that reached $3.87bn. This was the biggest outflow since November. A breakdown of the data showed that bond focussed ETFs were responsible for the net outflow last week. Last week, bond funds fell by $574mn, while equity-centric ETFs expanded by $40mn.
  • African bonds were not spared, with almost all ETFs that target specific African countries recording a net outflow last week. South African bond focussed ETFs suffered the biggest net outflow, with investors pulling $21.1mn last week. Egyptian and Nigerian focussed bond ETFs also suffered significant portfolio outflows last week, with investors pulling $11.1mn and $8.4mn, respectively. While African bonds were resilient in 2020 and 2021, the resilience has broken down this year, with African bonds suffering a substantial blow this year.
  • The hawkish shift from major central banks and shift higher in global interest rates have driven up debt servicing costs and made it significantly more expensive for African sovereigns to refinance themselves. In some instances, African government bond yields have more than doubled over the past 12 months, reflecting the higher lending costs and deterioration in investor risk appetite as mounting recession risks and the ongoing war in Ukraine continue to push investors into haven assets. As pointed out in recent commentary, near term risks for African bonds remain skewed firmly to the upside. That said, the next few months will present some excellent buying opportunities for investors before the global monetary policy tide turns and the appeal of bonds improves.
  • Base metals are trading lower this morning as concerns about a global downturn continue. Copper is near a nine-month low and tin has contracted just short of 3% at the time of writing. Investors are concerned that the recession clouds are building and the downturn will be aggressive which will allow the supply pressures to fade into the background as demand wanes. 
  • We caution investors against becoming overly bearish but concede that the Fed has been behind the curve on inflation and its attempt to play catch up could have real consequences for growth.
  • In the FX markets, the USD has regained its footing this morning, paring back almost all of yesterday’s losses after more hawkish Fed speak overnight. The Fed’s Barkin said that the central bank should raise interest rates as fast as it can without causing undue harm to financial markets or the economy. While Barkin is a non-voting member this year, the hawkish comments set the stage for Fed Chair Powell’s testimony later today, which should reaffirm the Fed’s commitment to reining in sky-high inflation. With the exception of the Japanese yen, G10 currencies are a sea of red this morning, with the likes of the New Zealand dollar losing more than 1% at the time of writing. As we head into the European open, emerging market FX is also weaker. The focus for currency traders will be centred on Fed Chair Powell’s testimony and the path of monetary policy in the US. Hawkish affirmations from the Fed chair should keep USD bulls at the helm.


Rand and International FX Commentary

  • The ZAR had the wind at its back on Tuesday, appreciating 0.90% against a broadly-weaker USD amid a tentative improvement in market sentiment. Investors should be cautious of reading too much into this, however, as there is still significant uncertainty over the global economic outlook and how aggressively the likes of the US Federal Reserve and other major central banks will need to tighten monetary conditions to ease inflationary pressures. 
  • Against this backdrop, Fed Chairman Powell’s testimony in Congress today and tomorrow will attract plenty of attention. Powell may provide a more detailed explanation for the outsized 75bp rate hike implemented a week ago, and also issue additional forward guidance for the upcoming policy meetings through the rest of the year. 
  • As things stand, the Fed looks set to front-load its rate hike cycle with more big rate hikes in the months ahead, until there are material signs that inflation expectations and core inflation are declining. Thereafter, it may begin to discuss a flatter rate-hike trajectory to try and avoid a so-called “hard landing” for the economy. However, in the meantime, the Fed’s hawkish outlook will likely keep the USD supported, while emerging-market currencies may remain under pressure for a while longer.

Nicholas Kabaso

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