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Overseas Bond Funds suffer 1 Trillion Won of Outflow in 3 Months
Capital Flight from Emerging Markets
Overseas Bond Funds suffer 1 Trillion Won of Outflow in 3 Months
  • By Yoon Young-sil
  • May 16, 2018, 12:39
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As the trend of higher global interest rates continues, the size of capital outflow from emerging countries is growing. In particular, not only equity funds but also bond funds, which were considered risk free assets, saw about 1 trillion won (US$925.93 million) of capital outflow in the past three months. Bond funds as well as government bonds, which already have a red alert, are affected by volatility of exchange rates.

A total of 978.4 billion won (US$906.18 million) of capital leaked from South Korea’s overseas bond funds in the past three months.
A total of 978.4 billion won (US$906.18 million) of capital leaked from South Korea’s overseas bond funds in the past three months.

According to securities industry sources on May 15, an accumulated amount of US$4 billion (4.32 trillion won) drained from emerging market bond funds for three weeks in a row. The figure accounted for 0.9 percent of total net assets. In fact, a total of 978.4 billion won (US$906.18 million) of capital leaked from South Korea’s overseas bond funds in the past three months, according to the data from financial data tracker FnGuide. By sector, global funds had the biggest capital outflow with 631.7 billion won (US$585.02 million). It is worth noticing that 25.9 billion won (USS$23.99 million) of money was withdrawn from 29 emerging market bond funds, which had continuously seen a capital inflow. Emerging market bond funds attracted 161.9 billion won (US$149.94 million) of capital in the past year due to high interest rates in emerging markets and maintained a net inflow of money in the beginning of the year. However, the trend turned to a net outflow in the past three months.

There have been a dramatic capital outflow from emerging countries since the middle of April. This is largely due to the fact that the central banks in emerging countries, which were concerned about additionally weaker currency, raised the benchmark interest rate as the stronger US dollar and weaker emerging market currency put more pressure on inflation in emerging countries. In addition, the economic momentum grew weaker throughout the global region, leading to the decreasing preference for risk assets. Jung Da-ee, an analyst at Meritz Securities Co, said, “The United States announced results that exceed market expectations owing to the new tax reform bill and weak dollar but other countries lowered the rate of profit modifications on the grounds of the U.S. protectionism.

Accordingly, overseas bond funds, which were considered one of relatively stable investments, see losses grow. They recorded a negative return of 3.89 percent after the beginning of the year and 2.65 percent in the past month.