LONDON, May 31 (Reuters) - Emerging shares fell almost 1 percent on Friday and were heading for their largest monthly loss in a year while most currencies posted fresh losses as investors fretted over a slowdown in emerging giants India and China.
Fear of a broad emerging markets slowdown was reinforced by Indian data showing the weakest growth in a decade, while Chinese data due at the weekend is also expected to stay soft.
MSCI’s emerging equity benchmark hit a new one-month low, bringing year-to-date losses to 4.5 percent. It received no respite from Thursday’s unexpectedly weak U.S. data, which dampened expectations of an early scale back of money-printing.
“The trend for emerging equities is very negative indeed, with a strong probability of major outflows from the asset class later this year,” said John-Paul Smith, head of emerging equity strategy at Deutsche.
“There are a lot of pension funds, retail investors and sovereign wealth funds who are overexposed to emerging market equities and we are probably half-way through the underperformance cycle.”
Emerging market funds suffered outflows of $2.89 billion in the week ended May 29, their largest outflows in 17 months, EPFR Global data showed.
Economies with big current account gaps are getting hit the hardest, with Indian and Turkish shares down 2 percent , the latter snapping an eight-month winning streak.
South African stocks meanwhile traded just off record highs in Johannesburg as local investors stepped in to buy big mining stocks that benefit from currency weakness but in dollar terms the market has lost 14 percent year-to-date.
South Africa has been hit hard by labour unrest, falling commodity prices due to lower demand from China and a weakening domestic economy, with the rand extending losses to new March 2009 lows after falling below 10 per dollar on Thursday.
The rand losses have fuelled big losses in local debt markets where benchmark yields surged 22 bps on Friday to six-month highs, having risen almost 100 bps in May.
Official data on Thursday showed foreigners sold over 10 billion rand in bonds this week while the cost of insuring 5-year South African debt rose 8 basis points to 197, Markit said.
The Turkish lira fell almost 1 percent to a near 18-month low against the dollar, its losses gathering pace after data showing the problematic trade deficit had widened more than expected in April.
Turkish yields pulled back slightly after a heavy selloff, that has seen 2-year yields rise 50 bps.
The bond selloff was reflected in data from EPFR Global that showed emerging debt funds have seen their first weekly outflows in a year, shedding $224 billion.
Yields on the benchmark local debt index, JPMorgan’s GBI-EM, are around 5.7 percent, more than 20 bps higher over the week and almost 50 bps on the month. Emerging countries’ dollar bond yield spreads were flat but are up around 17 bps on the month to 308 bps over Treasuries.
“Increased volatility across EM currencies, coupled with a pickup in core-rate market volatility, provides a bad mix for investing in EM local bonds,” Morgan Stanley analysts told clients, advising a reduction in exposure to the sector.
In emerging Europe, the forint fell 1.3 percent against the euro while the Serbian dinar fell 0.6 percent, a day after authorities intervened to support it.