Emerging market flows maintain their momentum in April
big asset allocators have come to believe that EM assets are cheap.”
Strong inflows help to compensate for outflows at start of year, though analysts warn of turbulence
Flows to emerging market stocks and bonds stayed strong for a second month in April according to estimates released on Thursday, more than compensating for the outflows driven by near-panic selling by foreign investors in the first two months of the year.
The Institute of International Finance, an industry body, said cross-border flows by non-resident investors into EM assets would reach $25.5bn in April, following a 21-month high of $37.1bn in March.
The inflows mark a sharp reversal after seven straight months of outflows that added up to $80.7bn between last July and February, according to the IIF.
“This is a sharp rebound driven partly by mean reversion,” said Robin Koepke, senior economist at the IIF. “You would have expected April’s flows to come down from the unsustainable level in March but it’s encouraging that they were still above the average for the past five years.”
The IIF expects foreign portfolio flows to EM assets to remain positive for the rest of 2016 at an average of about $16bn a month, somewhat below the five-year average of $22bn, with two-thirds going to bonds and a third to equities.
Investors flooded out of EM assets in the early weeks of this year on fears of a sharp economic slowdown in China, continuing weakness in the price of oil and other commodities, and on the prospect of interest rate rises by the US Federal Reserve.
Outflows turned to inflows when Beijing moved to calm fears and stimulate growth, oil recovered and stabilised and investors became convinced that the Fed would be much less hawkish than previously feared.
But Win Thin of Brown Brothers Harriman said investors could yet be surprised by the Fed at its next monetary policy meeting in June.
“We think June is still possible but markets don’t believe it,” he said. “People are saying the worst is behind us so it’s no surprise funds are flowing back in. As June approaches there will be more volatility but for now and at least into the early part of May there will still be some inflows.”
Dirk Willer of Citi warned that flows followed performance rather than the other way round, and that of the three drivers of EM performance, two could soon change course.
China will almost certainly come back to bite us and the Fed will, too
Dirk Willer, Citi
“Oil may have been resolved for good but the others are just resolved for the short term,” he said. “Nobody really likes the China story but Beijing has at least been successful in pushing the negative story out by three to six months. But China will almost certainly come back to bite us and the Fed will, too.”
He said big investors from the Middle East such as sovereign wealth funds had turned their attention to fiscal problems at home and were unlikely to return as a significant force in EMs. Retail investors would be driven by performance.
That left non-Middle East institutional investors as one significant source of sustainable EM inflows this year.
“They will stay a bit better than we were expecting earlier in the year,” he said. “They won’t be huge, but big asset allocators have come to believe that EM assets are cheap.”
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