The flight of investors from the once-booming emerging markets they previously favored with $7 trillion-worth of inflows may have only just begun.
It is mainly retail investors who have packed their bags and moved on to date. If and when big institutional firms join in, there is a risk of wholesale capital flight.
Signs of China slowing down and the global impact of a wind-down in U.S. monetary stimulus - effectively draining money from the system - have been particularly punishing in emerging economies dependent on external financing.
Currencies in Turkey, Argentina and Russia have hit record lows, for example, lifting safe-haven yen, Swiss francs and U.S. Treasuries in a sign of global contagion.
Such moves are crucial factors for foreign investors because exchange rate losses can easily wipe out any gains in stocks bonds in the high-yielding emerging world.
However, data on capital flows shows many long-term investors have either stuck with, or even added to, their emerging holdings. The outflows of over $50 billion seen since 2013 have largely been driven by retail investors.
But fears are that at some point the big investors will be forced to cut losses and run as the effect of falling currencies becomes too painful to bear.
"Every emerging market crisis is first-and-foremost a currency crisis," said Mike Howell, managing director of London-based CrossBorder Capital.
"Emerging economies have very weak private sector cash flow growth. This is both a cyclical but also a structural problem. There is a lot more pain to take out in the emerging markets."
Emerging debt performance of the past year illustrates how currency moves matter. For example, South African government debt was slightly positive in rand terms in 2013. But in dollars terms, it lost more than 18 percent, according to Citi's bond index.
And in the past three months or so, the dollar has risen 2 percent against key developing currencies.
Fund tracker EPFR estimates emerging equity and bond funds have seen outflows of almost $5 billion so far this year, on top of $58 billion of losses seen in 2013. EM equity funds have had 13 consecutive weeks of outflows, the longest run in 11 years.
JP Morgan estimates emerging equity exchange-traded funds have already seen a net redemption of $4.2 billion this year.
And emerging stocks .MSCIEF are the worst performer in global markets this year, having lost 4 percent.
But investor positioning so far seems far from extreme. CrossBorder's emerging market risk appetite index, measured by normalized weightings of investors in equities less bonds, stands at a moderate -3, the lowest only since August and ca far cry from the -40 seen in 2012.
"What we haven't seen in emerging markets is major currency devaluation, a run on government debt or ratings downgrades. Any combination of those would suggest humiliation trade (a complete giving up of the asset class) is taking place," said John Bilton, European investment strategist at Bank of America Merrill Lynch.
SUDDEN STOP
Now investors may need to be braced for further outflows.
The Institute of International Finance expects capital inflows into emerging markets, which include buoyant direct investments, to fall more than 3 percent to $1.029 trillion in 2014 - the lowest since at least 2009. Portfolio equity flows are forecast to be down $17 billion.
World Bank warned earlier this month of the risk of a sudden stop in capital flows for emerging markets, a point which was discussed by the International Monetary Fund as well.
The bank said long-term interest rates are subject to a sudden rise of as much as 200 basis points under a scenario of disorderly adjustment when super-easy Western monetary policy begin normalizing.
This could cut financial inflows to developing countries by as much as 80 percent for several months.
In such a case, nearly a quarter of developing countries could experience sudden stops in their access to global capital, throwing some economies into a balance of payments or financial crisis, the Bank said.
Stephen Jen, managing partner of SLJ Macro Partners, says emerging markets will have seen the worst - which involves currencies falling a further 10-15 percent - when the rising U.S. 10-year yield reached 4 percent.
The yield was 2.7 percent on Friday.
"The worst is ahead of us, not behind us," Jen said.
(Editing by Jeremy Gaunt)
REUTERS
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