ETFs’ Milestone Outflow Marker
ETFs led the debt and equity surrender from mid-May as they accounted for 30-70 percent of outflows from the BRICS supplemented by Indonesia and Mexico, with the New York Stock Exchange giant Vanguard MSCI index fund with $40 billion in assets experiencing heavy losses and volatility as many new bond vehicles scrambled to honor redemptions. The structures have become a decisive force since 2008 with retail investor entry as they mark two decades since introduction with US expansion to $1.5 trillion overall for one-tenth of traditional mutual fund size. Of the 1000 registered only around 50 are actively managed and the passive varieties offer a range of leverage and shorting features. Three sponsors control 80 percent of the market, and households attracted by low costs have put in hundreds of billions of dollars according to industry sources. EM-specific figures show that the inflows accelerating since last fall when the Fed’s quantitative easing was extended have been erased one-third for bonds and two-thirds for stocks, with the former likely to catch up as US high-yield also folds. Shorting has already risen to one-quarter of that asset class, as NAVs across-the-board display record standard deviation for traders employing quantitative strategies. While institutions use ETFs and public mutual funds, the outflow magnitude the past few months could be far greater through private account and balance of payments data which is only loosely tracked or appears with a lag. ETF equity flight of $25 billion since February is only a portion of the over $200 billion the IIF reported in 30 countries from 2010-12, while the debt figure was five times higher. In the corporate category in particular, monthly issuance has slowed to a fraction of the previous $30 billion average pace, with lower-rated borrowers essentially shut out. Even at better grades including for quasi-sovereigns Moody’s has warned of governance and domestic financial market constraints deserving overdue attention. In Asia in particular China’s money market squeeze has cast a further shadow over China property company external paper where yields and default rumors spiked following last year’s curbs. In the region consumer credit has mushroomed as a share if GDP across the ASEAN bloc with Malaysia’s 75 percent at the top but still paltry in comparison with Korea’s $1 trillion total.
The corporate default rate hit 10 percent in 2009 as many balance sheets took currency and earnings as well as derivatives hits after assuming indefinite appreciation cycles. Big names like Cemex had to restructure with government aid, and India restricted foreign access with large state bank and family conglomerate exposures. Turkey was in difficulty as international banks reduced syndicated and trade lines but only recently have major firms tapped the global bond market on the back of the consensus investment-grade rating now in abeyance as popular disquiet dispels that sense.
