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South Africa: Counting the Cost of ‘Taper Tantrum’ Fears for Emerging Markets

Appeal for emerging market and South African assets returned last week when inflation fears subsided on US data, and risk appetite returned. However, the latest data show that the scale of outflows before that approached the peak of the 2013 taper tantrum – a forewarning of what might be yet to come.

The evidence is now available about how severely emerging market investments have been hit by the market’s anxiety about inflation returning and central banks tightening the monetary policy reins earlier than expected – and it’s not a pretty sight.

The latest Institute of International Finance data show that the scale of outflows approached those seen at the peak of the 2013 taper tantrum, with the biggest emerging market investment selloffs seen in emerging markets outside China, as shown in the graphs below.

However, last week saw demand return for riskier assets brought on by US inflation data that held no surprises and increasingly optimistic expectations for global growth in the wake of the signing of the $1.9-trillion US fiscal package.

In South Africa, the mid-week shift in sentiment was not enough to turn around foreign investment disinvestments, with the bonds still experiencing outflows of R1.1-billion for the week…