From Nomura’s Nordvig and Sahni:
There are probably two conditions needed for the EM sell-off to halt. First, we need US rates to stabilize. Second, we need redemptions to work their way through the system. Now that US equities are showing signs of turning, it is possible that US rates are going to stabilize. However, we worry that the EM flow story could have momentum of its own (and there could be a wave a further equity outflows too). For context, high-frequency EPFR mutual fund data show that, as of last Wednesday, we had only unwound a very small portion of the cross-border flows into EM from the US and eurozone that occurred between September 2012 and May 2013 (i.e., since the OMT announcement). Specifically, only 10-20% of post-OMT EM equity flows from the US and eurozone, and less than 5% of the post-OMT EM bond flows have been unwound so far (Figure 2). In addition, the absolute scale of these flows can be very large, as overall BOP data show that there have been a total of more than $250bn portfolio outflows from the eurozone and almost $150bn outflows from the US during this period (Sep 2012 – Mar 2013). The BOP numbers include DM flows as well, but we estimate that a sizeable 40% of the eurozone flows were to EM. Thus, we are wary of catching the falling knife by trying to time the end of this position washout.
That said, it is difficult to compare EM sell-offs with past blowups given that reserve positions are generally bigger, and funding has increasingly been in local currency, along with the fact that inflation risks (and pass-through) are smaller. Hence, we would not want to extrapolate the EM weakening into infinity (although quite a bit of commentary is now in this direction), and will look to use these moves as entry points to add to our preferred EM exposure, once markets settle.