Picture: THINKSTOCK
Picture: THINKSTOCK

LONDON/NEW YORK — Global investors and companies had pulled $735bn out of emerging markets last year, the worst capital flight in 15 years, the Institute of International Finance said on Wednesday.

The amount was almost seven times more than that recorded in 2014, the Washington-based think-tank said in a report.

China was the biggest loser, with $676bn leaving its markets. The institute predicted that investors might withdraw $348bn from developing countries this year.

"It seems like 2015 was even worse than we previously thought," said Charles Collyns, MD and chief economist at the institute. "And in 2016 we don’t expect things to get much better."

The institute, an authoritative source of data on the developing world’s investment flows, said China had fuelled last year’s losses and would be vital this year. China’s economy grew at its weakest pace in a quarter of a century last year.

"But the weakness extends well beyond China … We have seen persistent portfolio outflows out of a broad range of emerging markets, with investors increasingly worried about growth prospects and high corporate indebtedness," Mr Collyns said.

The institute said Turkey, Brazil and SA were some of the countries most vulnerable. All suffer from weak macroeconomic policy, high foreign exchange corporate indebtedness and significant current account deficits.

India and Mexico are bright spots. But with China fears growing and Brazil and Russia in recession for a second consecutive year, investment returns are unlikely to recover soon, many fear. "Premature ageing of emerging markets may continue to weigh on growth prospects, and market volatility in early 2016 has weighed on risk appetite," said Hung Tran, executive MD at the institute.

He told reporters there was no sign of panic in global market selling, but contagion could spread and a "true crisis" could develop.

While many investors worry that rate increases in the US will hurt emerging markets, the institute doubts they will have much effect. "The impact of the (US Federal Reserve’s) shift to a tightening cycle may be limited as long as it is gradual, but flows to emerging markets will continue to face headwinds from growth and debt concerns," it said.

Emerging stock and bond markets are trading at discounts compared with developed markets, which some investors may view as a compelling reason to invest. But poor fundamentals were likely to keep most investors away, it said.

Mr Tran said that while emerging market stocks on average were undervalued, China may still be considered as overpriced and selling might continue, feeding a fresh bout of global market turmoil.

Bloomberg and Reuters