Turkish lira banknotes are seen in this picture illustration taken in Istanbul in this file picture.

New York - Investors are pulling money from exchange-traded funds that track emerging markets at the fastest rate on record, as China’s slowing growth and cuts to central-bank stimulus sink currencies from Turkey to Brazil.

More than $7 billion flowed from ETFs investing in developing-nation assets in January, the most since the securities were created, data compiled by Bloomberg show.

The iShares MSCI Emerging Markets ETF has seen its assets shrink by 11 percent, while the Vanguard FTSE Emerging Markets ETF is poised for the biggest monthly redemption since the fund was started in 2005.

The WisdomTree Emerging Markets Local Debt Fund is on track for an eighth straight month of withdrawals.

Investors accelerated redemptions after data showed Chinese manufacturing contracted and Argentina’s unexpected devaluation of its peso dented confidence in Latin America.

Surprise rate increases by central banks in Turkey and South Africa failed to boost their currencies, while the US Federal Reserve opted to press on with reductions to its monetary stimulus.

“A lot of speculative money has been circulating in the emerging markets and the party seems to be over, at least for now,” said Howard Ward, the chief investment officer for growth equity at Rye, New York-based Gamco Investors Inc., which oversees about $40 billion.

“There is a growing lack of confidence in the economic policies of many emerging markets at a time when growth is slowing and inflation is a real problem.”

Cheap Money

Emerging economies have benefited from cheap money as three rounds of Fed bond buying pushed capital into their borders in search of higher returns.

The central bank began paring the purchases by $10 billion to $75 billion this month and announced yesterday plans to reduce the amount by another $10 billion.

The MSCI Emerging Markets Index of equities is off to the worst start to a year since 2008, with almost $500 billion erased from stocks this year.

Turkey and South Africa followed counterparts from Brazil to India in tightening monetary policy as exchange rates for the lira and the ruble tumbled to records.

Withdrawals from the iShares fund and the Vanguard ETF, the largest such products by assets for emerging markets, totalled $1.9 billion on January 27, the biggest one-day redemption since 2005, data compiled by Bloomberg show.

About $58 million has been withdrawn from the WisdomTree debt fund this month, bringing the total redemption since June to $752 million.

Crisis ’Shock’

“Obviously that is a shock, and people are panicking much more than we thought,” Julian Rimmer, a broker at London-based CF Global Trading UK, said in an interview.

“And then you realise, maybe this is a crisis.”

The selloff in developing-nation ETFs picked up after a January 23 report from HSBC Holdings Plc and Markit Economics Ltd. said Chinese manufacturing may contract in January, raising concern about the growth outlook for a country that buys everything from Chile’s copper to Brazil’s iron ore.

Hours later, Argentina’s peso started sliding as the central bank pared dollar sales to preserve international reserves that have fallen to a seven-year low.

The central bank said the next day it would ease currency controls, capping a 15 percent weekly loss.

A Bloomberg customised gauge tracking 20 emerging-market currencies fell to 89.50 at 7:41 a.m.

New York time, the lowest level on a closing-market basis since April 2009.

The index has tumbled 10 percent over the past 12 months, bigger than any annual decline since it slid 15 percent in 2008.

Currency Declines

Russia’s ruble weakened the most among 24 emerging-market currencies since the rout began, tumbling 3.1 percent against the dollar since January 23 and sinking to a record versus a euro- dollar basket monitored by the central bank.

Bank Rossii reiterated in a statement on its website today its policy of taking unlimited action in currency markets if the ruble slips beyond its target corridor.

South Africa’s rand touched a five-year low today and Hungary’s forint, the day’s worst performer, weakened 2.7 percent since January 23.

The Turkish lira touched a record-low of 2.39 per dollar on January 27 before recovering after policy makers called an emergency meeting and raised benchmark lending rates.

The flight from emerging markets started last May when Fed Chairman Ben S. Bernanke first suggested the central bank may scale back its stimulus before the end of the year.

Almost $9 billion was pulled out of ETFs that track developing markets in 2013, the first annual outflow since the securities were created.

The funds attracted more than $110 billion in the previous decade as a booming Chinese economy and low interest rates in the US spurred demand for risky assets.

Flowing Back

Mark Mobius, the chairman of Templeton Emerging Markets Group, said inflows into developing nations will resume later this year.

“People are enjoying what they see as a bull market in the US,” he said in an interview in Johannesburg yesterday.

“As we go forward, we’re going to see a lot of overweight positions in the US So, given the fact that emerging markets are still growing fast, given that they have low debt-to-gross domestic product ratios, given that they have high foreign-exchange reserves, we believe that money will be flowing back in again to emerging markets.”

John-Paul Smith, a global emerging-market equity strategist at Deutsche Bank AG, disagrees. Withdrawals may accelerate among retail investors and pension funds, at least until growth in China stabilises, he said.

Credit Boom

“They haven’t started reducing yet, compared with how much money has come in over the last 10 years,” Smith said in a phone interview from London.

Deutsche Bank is the world’s biggest currency trader.

“I suspect retail investors are in the process of selling now and it will increase through the year.”

The Fed’s asset purchases had helped fuel a credit boom in developing nations from Turkey to Brazil. Accumulated capital inflows to developing-country’s debt markets since 2008 reached $1.1 trillion, or $470 billion more than their long-term trend, according to a study by the International Monetary Fund in October.

The inflows encouraged borrowing, pushing Turkey’s current-account deficits to more than 7 percent of its gross domestic product and making the nation more reliant on foreign capital.

The lending growth also fuelled inflation, with Brazil’s consumer prices staying above the central bank’s target since August 2010, eroding the competitiveness of the economy.

“It’s quite a challenging outlook,” David Simmonds, the head of currency and emerging-markets strategy at Royal Bank of Scotland Group Plc, said in a phone interview from London.

“Turkey and a number of other countries during the years of global liquidity injection have over-consumed and over-imported. We are only in the early stage of the adjustment.” - Bloomberg News