Capital flows to emerging market securities reached $13.8 billion in May, a more than three-fold rise from a year earlier, supported by purchases of debt instruments, according to the Institute of International Finance.
The flows last month jumped from $4.1bn recorded in May 2020 at the peak of pandemic lockdowns. On a monthly basis, they declined from $45.5bn in April.
"The EM complex finds itself in a process of slow recovery," Jonathan Fortun, an IIF economist said in a report on Tuesday. "While many countries see renewed hope with partial opening of their activities, some new lockdowns are limiting a wide and lasting snapback."
The capital flows dynamic of emerging markets in May was mainly supported by investments into debt securities, accounting for $9.8bn of the total capital minus China, which suffered outflows of $1bn. A supportive environment for risk assets is fuelling the rebound in emerging market local debt and helping total returns to recover, according to the IIF.
Investments into emerging markets equities suffered outflows during May as uncertainty grew around the outlook for inflation. Emerging market equity investments excluding China fell by $7.3bn, but Chinese equities recorded a positive inflow of $11.3bn last month.
“The build-up of inflationary pressures across the market have hurt the outlook – especially on equities – and [have] put the focus on the response of policymakers,” Mr Fortun said.
Capital flows to emerging markets portfolios are slowly recovering after a sharp drop last year, as investments waned amid the coronavirus pandemic. Flows to emerging market portfolios declined 13 per cent year-on-year in 2020 to $313bn.
Persistent fiscal scarring amid the pandemic has contributed to an increase in the debt burden across emerging markets, widening fiscal deficits and presenting further challenges, according to the IIF.
Global debt declined for the first time in 10 quarters by $1.7 trillion to $289tn in the first three months of 2021. However, it rose by $600bn to a record high of more than $86tn in emerging markets, the IIF said in a May report.
The risk of “idiosyncratic events” and a “taper-tantrum” – the panic in global markets that triggered a spike in US Treasury yields in 2013 after investors learned of the Federal Reserve’s plans to slow its quantitative easing programme – are also weighing on the outlook for emerging markets, the IIF said on Tuesday.
“Nevertheless, initial conditions for most EMs are more favourable than ahead of the 2013 taper tantrum,” Mr Fortun said.
The importance of policy credibility will be “paramount in the months ahead”, especially given rising interest rates, he added.
In terms of regional flows, the IIF's data showed mixed results. Latin American markets received the greatest inflows of $6.2bn and $1.7bn for equity and debt, respectively. Emerging markets in Europe, Africa and Middle East accounted for $6.5bn of inflows, whereas emerging Asian markets suffered net outflows of $500 million.