Capital flows to emerging markets slump 13% in 2020 amid Covid-19 crisis

The inflows, however, recovered in December, making the fourth quarter the strongest for EM securities, according to IIF

The skyline of the central business district in Beijing. Emerging Market portfolios attracted $313bn in investment in 2020. Getty Images

Emerging Market portfolios attracted $313 billion in investments inflows in 2020, down 13 per cent compared to the previous year as global markets were rattled by the coronavirus pandemic, according to the Institute of International Finance (IIF).

However, the inflows recovered in December, making the fourth quarter the strongest for EM securities as economies bounced back and rollout of Covid-19 vaccines buoyed investor confidence.

Emerging market securities attracted $45.9bn last month of which $29.3bn went to equities. Chinese equities alone attracted $13.2bn in inflows.

Bonds and other debt securities recorded $16.6bn of inflows from non-residents last month, the IIF said in its latest report released on Thursday.

“An impressive reading [in December] considering that the Covid-19 shock meant one of the deepest and most violent outflow episodes on record,” the IIF said. “The main driver for this recovery is the impressive performance of China debt flows, along with the recovery of all other asset classes.”

China was the first country to report the coronavirus in December 2019. However, strict movement restrictions introduced by Beijing helped contain the outbreak in the country and the subsequent easing of lockdown measures further accelerated its economic recovery.

The International Monetary Fund sees China's economy expanding 8.2 per cent in 2021 after slowing to about 1.9 per cent last year. The country is also expected to overtake the US to become the world's biggest economy in 2028 as it recovers faster from the pandemic, according to the Centre for Economics and Business Research.

“Overall, the exodus of capital from emerging markets is now firmly in the rearview mirror and robust inflows look set to continue,” the IIF said.

In December, EM Asia saw inflows of $21.9bn, followed by Latin America at $11.9bn and Africa-Middle East at $7bn. Emerging markets in Europe attracted $5.2bn in investment last month.

The global economy is set to expand 5.2 per cent in 2021 after contracting 4.4 per cent last year, according to IMF projections.

In November, the IIF said the emerging markets were witnessing the “strongest pace” of capital flows on positive news related to the development of a Covid-19 vaccine.