Capital flows to emerging markets down 78% in May amid pandemic

Flows to emerging markets dropped to $4.1bn last month, the Institute of International Finance says

Customers wearing protective masks wait in line at a dairy store during a lockdown imposed due to the coronavirus in Mumbai, India, on Monday, June 1, 2020. Despite a strict two-month-long lockdown, the outbreak in India’s financial capital has snowballed, with the city now accounting for nearly a quarter of India’s more than 4,700 deaths and more a fifth of India’s over 165,000 infections. Photographer: Dhiraj Singh/Bloomberg
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Capital flows to emerging markets securities fell 78 per cent in May despite efforts to reopen economies in Asia and North America that have been hit by Covid-19, the Institute of International Finance said.

Emerging markets attracted around $4.1 billion (Dh15.05bn) in capital flows last month, far lower than capital flows in April, the IIF said in its latest Capital Flows Tracker report.

While the impact of the Covid-19 outbreak was first noticed in January and limited to China only, the spread of the virus in March rattled investors and stifled flows to emerging market securities.

The IIF said that the pandemic's cascading nature in the subsequent months left some emerging markets depressed.

“We’ve started to see some of the more beaten down parts of the capital markets play catch-up and there is a great deal of focus on how sustained this trend will be and how broadly it is felt across emerging markets,” Jonathan Fortun, an economist at the IIF said.

“Tension between Washington and Beijing may also weigh on sentiment as the clock ticks down to the November US election,” he said

Mr Fortun said there will be more focus on whether China's central bank will let the yuan depreciate further.

The pandemic had infected more than 6.27 million people worldwide and killed more than 375,000 as of Tuesday, according to Johns Hopkins University, which is tracking the outbreak worldwide.

The outbreak is the biggest challenge facing the world economy since the 1930s and is set to tip it into the deepest recession to date, according to the International Monetary Fund.

Covid-19 has disrupted global supply chains, upended global trade and brought the travel industry to a grinding halt.

Governments were forced to shut borders, restrict movement and close all but essential businesses.

Economies in Europe, Asia, the Middle East and North America have gradually started opening four months after the World Health Organisation declared the Covid-19 a pandemic.

However, the rate of infection is on the rise in countries such as India and Brazil, which is making investors wary.

The IIF said equities attracted about $700 million of flows in May, while emerging market debt continued to recover, receiving $3.5bn.

“On the equity side, the negative trend which we observed last month continued. Outflows from EM [excluding] China equities amounted to $4.1bn, while flows to China equities posted a net inflow of $4.8bn, highlighting the divergence in performance between China and the rest of the emerging markets complex,” Mr Fortun said.

Regionally, the increase in debt flows was distributed between emerging Asia and emerging Europe – both experiencing an inflow of $1.4bn – followed by $1.3bn in Latin America, according to the IIF.

Overall, negative sentiment on emerging markets approached “extreme levels a few weeks ago”, setting the stage for a period of stabilisation and more two-way discussions on risks and opportunities in the emerging markets space.

“We see this shift in sentiment as healthy, reflecting deeply discounted valuations in many places, which mean that adverse economic outcomes and weak growth are largely priced,” Mr Fortun said.