Leading emerging market (EM) bond ETFs clocked up over $900m outflows in the final week of September as investors look for greater transparency in the face of the Evergrande crisis.
As the impact of the debt-laden firm continues to ripple through markets, the $4.9bn iShares J.P. Morgan EM Local Govt Bond UCITS ETF (IEML) recorded $277m outflows while the $1.6bn iShares J.P. Morgan $ EM Bond UCITS ETF (JPEA) saw an asset exodus of $246m in the week ending 1 October.
Elsewhere, the $789m Xtrackers USD Emerging Markets Bond UCITS ETF saw outflows of $224m over the same period, according to data from Ultumus.
The outflows come as investors start to ask questions over the transparency of the EM debt market as the Chinese property giant continues to sit in a $306bn debt pile.
Jose Garcia-Zarate, associate director of passive fund research for EMEA at Morningstar, said Evergrande is likely to have been a key factor in the recent outflows but noted the asset class has been “shedding flows for much of the year”.
“Emerging market debt sentiment is very dependent on the ups and downs of the Federal Reserve’s policy cycle and this year the general trend has been one whereby the market has been pricing in higher chances of earlier rate hikes in the US,” he said.
Outflows also gained traction earlier this year the Federal Reserve brought forward its interest forecasts by signalling at least two hikes before the end of 2023.
Athanasios Psarofagis, ETF analyst at Bloomberg Intelligence, argued Evergrande has had a huge impact on investors sentiment in emerging markets – particularly China – adding that US equities have found themselves as a beneficiary.
“More investors are realising the impact China has on emerging market indices and some of those flows found their way into US equities on the weakness,” he said.
Meanwhile, the iShares Core S&P 500 UCITS ETF (CSPX) saw record flows of $1.6bn over September, according to data from Bloomberg Intelligence, accounting for over half of its entire flows over Q3.
Garcia-Zarate also noted not all emerging market debt has suffered the same fate over 2021, pointing to the $12.7bn iShares China CNY Bond UCITS ETF (CNYB) which has amassed inflows of roughly $560m in the past month.