Ye Xie and Elena Popina New York

Investors are stepping up withdrawals from emerging-market exchange-traded funds (ETFs) and shifting into Europe as concern mounts that growth is faltering in developing nations while advanced economies strengthen.

Withdrawals from US-based ETFs investing in emerging market equities and bonds have totalled $11.3 billion (R121bn) this year, already surpassing the redemption of $8.8bn for all of last year. Funds investing in European assets added $5bn in the first two months of this year, compared with $18bn inflows last year.

Returns in emerging-market stocks this year are trailing their European peers the most since 2011 as China’s economy slowed, currencies from Turkey to South Africa tumbled while violent protests in Ukraine fuelled geopolitical tension. In Europe, economic confidence increased for a ninth month in January, suggesting the scars from the ravages of the sovereign-debt crisis in 2011 are healing.

“What you see is the transition of funds from emerging to developed markets,” Bahl & Gaynor money manager Scott Rodes said on Thursday.

“Investors view Europe as a safe place. The fundamentals are going to be challenging for the emerging markets for at least six months.”

The MSCI emerging markets index has lost 3.9 percent this year, while the Stoxx Europe 600 index has risen 2.7 percent, the biggest divergence for the start to a year since 2011. Last year the developing nation gauge slid 5 percent, compared with a surge of 17 percent for the European measure.

Total assets of emerging market stock ETFs have declined by 10 percent to $93bn this year, while bond funds have declined 2.5 percent to $8.8bn.

Growth in China, which buys everything from Brazil’s iron ore to Malaysia’s oil, is slowing as the government curbs lending.

Central banks in Turkey, India, South Africa and Brazil have increased interest rates this year to stem currency depreciation, dimming the outlook for growth.

Political turmoil has also helped decrease demand for emerging market assets. An interim government took charge in Ukraine as Viktor Yanukovych was ousted as president last weekend after a three-month protest in Kiev ended in a bloody crackdown and 82 deaths. Protests against shortages of basic goods, rising crime and the world’s fastest inflation are threatening Venezuela’s President Nicolas Maduro’s grip on power.

“The rise in geopolitical risks” weighed on investors’ sentiment, Solaris Group chief investment officer Timothy Ghriskey said. “What is even more important is what’s going on in China, which is sending ripples across all the emerging markets.” – Bloomberg