(Bloomberg News) Emerging-market equity funds posted the third-largest weekly outflows on record amid Standard & Poor's unprecedented downgrade of the U.S. credit rating and a spread in Europe's debt crisis, Citigroup Inc. said.

Funds investing in developing-nation stocks reported withdrawals of $7.7 billion in the week ended Aug. 10, Citigroup analysts led by Markus Rosgen said in a report today, citing figures compiled by EPFR Global. That took total net outflows for the year to $14 billion, according to Citigroup.

"The credit downgrade of US by S&P and market concerns of spreading European debt crisis led to brutal market selloff and redemptions," Kelly Kwok, one of the analysts in the Citigroup report, wrote in an e-mail.

The MSCI Emerging Markets Index sank 11 percent in the five days ended Aug. 10 after S&P cut the U.S.'s sovereign-debt rating from AAA to AA+ and as contagion from Europe's debt crisis threatened to spread to Italy, Spain and France. Almost $7 trillion has been erased from global equity values since July 26, with benchmark indexes in Brazil and China falling more than 20 percent from their recent highs to enter so-called bear markets.

MSCI's developing-nation index fell 0.3 percent to 986.66 as of 4:25 p.m. in Singapore, taking its loss for this year to 14 percent. That's more than the 8.8 percent fall in the MSCI World Index. Companies on the emerging-market index are trading at 9.8 times estimated earnings, less than the four-year average multiple of 11.9 times.

Lowering Targets

Citigroup analysts this week lowered their stock-index forecasts for India, South Korea and Taiwan and China, citing the global market turmoil and the outlook for economic growth worldwide.

Morgan Stanley set a "bear-case target" of 940 for the MSCI Emerging Markets Index this year. A bear-case scenario entails a combination of a Chinese hard landing for the economy, a U.S. double-dip recession and a worsening of the European debt crisis, analysts led by Jonathan Garner said in a report dated Aug. 8. China and Malaysia are most likely to be defensive in a bear-case scenario, they said.

Asia excluding Japan equity funds reported $2.9 billion of outflows during the week, while emerging Europe, Middle East and African funds lost $940 million, Citigroup said. Withdrawals from funds investing in Latin America stock amounted to $693 million, while the diversified emerging-market equity funds saw $3.2 billion of outflows, according to the report.

Markets 'Oversold'

Hans Goetti, Finaport Investment Intelligence's chief investment officer for Asia, said markets are "oversold" and that a new round of asset purchases by the Federal Reserve under the program known as quantitative easing could boost shares. The Fed said on Aug. 9 it will keep benchmark interest rates near zero until mid-2013, spurring a two-day, 2.2 percent rebound in the MSCI Emerging Market Index.

"If you look at the fundamentals, we actually expect the Fed to come up with more substantial measures rather than just keeping interest rates low for another two years," Goetti said in a Bloomberg Television interview. "It's a matter of time till QE3 comes with additional asset purchase. That could spark another rally in equities and risky assets." Zurich-based Finaport oversees $1.4 billion in client assets.