Emerging Market Fund flows out the highest

from Bloomberg:

Emerging market equity funds lost $1.6 billion in weekly withdrawals, the biggest outflows in 24 weeks, as earnings and Greece’s debt woes raised concerns that the global recovery may falter, EPFR Global said.

Investors removed almost $1 billion from global emerging market stock funds in the week ended Feb. 3, the most in more than a year, and withdrew $516 million from Asian equities outside of Japan, the research company said in a statement.

The MSCI Emerging Markets Index fell 2.6 percent to 902.12 as of 5 p.m. in Hong Kong, the lowest since Oct. 2. The gauge of 22 developing nations, which rallied a record 75 percent in 2009, has slumped 12 percent from this year’s peak on Jan. 11, entering a correction, on speculation central banks from China to Brazil will start to raise borrowing costs to curb inflation.

“Recoveries have been reliant on policy measures,” said Michael Auyeung, who manages about $500 million as chief investment officer at Pacific Mutual Fund Bhd. outside Kuala Lumpur. “As we move into the transition phase where the burden of growth shifts back towards the private economy on stimulus withdrawal, we will start to get a better idea of how bad the damage has been to the structural integrity of the financial and business architecture. We may not like what we find.”

Global stocks are plunging for a second straight day as U.S. initial jobless claims rose unexpectedly last week and companies from MasterCard Inc. to Monster Worldwide Inc. reported earnings that trailed analyst estimates. Shares also retreated on concern Greece’s attempts to cut the European Union’s biggest budget deficit may hurt other nations in the region.

‘Reasons For Caution’

“Investors had plenty of reasons for caution going into February as corporations continued to paint a gloomy picture for earnings in 2010, Greece’s debt story went from bad to worse and policy makers began to flesh out their ideas for closing yawning budget deficits,” EPFR wrote.

Emerging market currencies also weakened today in Asia amid concern that Europe’s fiscal woes have eroded investor appetite for riskier developing-nation assets. South Korea’s won dropped the most in two months while India’s rupee was headed for its biggest two-day loss since October. Indonesia’s rupiah dropped the most in 10 weeks.

The cost of protecting Asian corporate and sovereign bonds from default surged. The Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan rose 11 basis points to 128 basis points, Deutsche Bank AG prices show. That’s the biggest increase since Aug. 17 and takes the index to its highest since Sept. 9, CMA prices show.

China Losses

During the week, Latin American funds posted outflows, while those buying emerging Europe, Africa and the Middle East shares reported “modest” net inflows, EPFR said. Within Asia, China equity funds reported net outflows for the fifth time in six weeks while Indian funds lost $180 million, the most in 68 weeks, according to the statement.

China’s Shanghai Composite Index has dropped 10 percent this year, among the 10 worst performers globally. In India, the Bombay Stock Exchange’s benchmark Sensitive Index has slipped 9.1 percent.

A report this week that showed China sustained its manufacturing last month heightened speculation the government will take additional measures to prevent the economy from overheating, while India’s central bank increased its cash reserve ratio by more than economists had forecast.

Too Early to Buy?

JPMorgan Chase & Co. said last month it was turning “less bullish” on developing-nation equities in the first half of 2010 amid concern central banks will tighten monetary policy to combat accelerating inflation. Nikhil Srinivasan, the chief investment officer for Asia and the Middle East at Allianz Investment Management, also said this week it was too early to buy stocks, including those in China, even as they decline.

Still, BofA Merrill Lynch Global Research said this week that China’s stocks are “approaching a bottom” as concerns of tightening are overstated, joining CLSA Ltd., Morgan Stanley and Macquarie Group Ltd., in predicting a rebound in the nation’s equities.

During the week, developing-nation bond funds attracted $406 million, according to EPFR. Overall, equity funds with $3.1 trillion in assets lost $981 million while bond funds with $1.1 trillion in assets drew $4.6 billion in new inflows, the Cambridge, Massachusetts-based research company said.