Emerging stocks burn investors piling in at highs

The biggest selloff in emerging-market stocks since March is handing losses to investors who piled in as the benchmark index rose to an 18-month high.

The two-largest US exchange-traded funds that invest in developing nations recorded net inflows of $2.04 billion in the week ended July 30, the biggest purchases in about four months, while China-focused ETFs attracted the most money among 24 countries, data compiled by Bloomberg show.

Asia ETFs and mutual funds lured $2.3 billion, the most since 2007, according to EPFR Global data compiled by Citigroup Inc.

The MSCI Emerging Markets Index sank 1.2 percent and extended its retreat Friday as lower-than-estimated earnings at Samsung Electronics Co., unrest between Russia and Ukraine and a default by Argentina spurred speculation that the rally has gone too far.

The gauge had climbed as much as 7.8 percent this year as China’s economy accelerated and concern eased that Federal Reserve stimulus cut will spur capital outflows.

“Previously, better global growth called for a higher-risk approach,” Daphne Roth, the Singapore-based head of Asian equity research at ABN Amro Private Banking, which oversees about $207 billion, said by phone. “With what has happened, we are more wary.”

The past week’s fund purchases helped turn flows into all US-listed emerging-market funds positive for the year on July 24, reversing investor flight that had drained as much as $13.9 billion in the first 2 1/2 months of the year.

The MSCI emerging-markets index slipped 0.5 percent to 1,061.01 at 10:12am in Hong Kong, heading for the lowest close since July 11. The MSCI Asia Pacific Index dropped 0.8 percent, paring this year’s gain to 4.5 percent.

The developing-nation gauge is valued at 11 times estimated earnings for the next 12 months, versus a three-year average of 10 times, according to data compiled by Bloomberg.

Its 14-day relative strength index had climbed this month above the 70 threshold that some traders use as a signal a rally is overdone.

“This is a correction,” Hans Goetti, a Singapore-based money manager at Banque Internationale a Luxembourg SA, which oversees about $40 billion, said by phone from Singapore. “It is still an uptrend.”

Technology shares tumbled as Samsung Electronics, the world’s biggest smartphone maker, posted a drop in net income, while OAO Sberbank fell in New York as the European Union banned the state-controlled lender from selling bonds or shares in the 28-nation bloc.

Standard & Poor’s said Argentina was in default after it missed a $13 billion interest payment on debt and negotiations failed.

The retreat in stocks extended Friday even after China’s manufacturing expanded in July at the fastest pace in more than two years, signalling a pickup in the economy as the government boosts credit growth and accelerates spending.