Emerging market securities attract $31.2bn in capital flows in February

Non-resident portfolio inflows to emerging market equities hit $8.4bn and debt instruments attracted $22.8bn, IIF report says

The India Gate war memorial on October 17, 2019. Reuters

Emerging market securities saw foreign net inflows of about $31.2 billion in February, supported by vaccination roll outs and higher commodity prices, according to a new report from the Institute of International Finance (IIF).

Non-resident portfolio inflows to emerging market equities hit $8.4bn last month and debt instruments attracted $22.8bn, the Washington-based institute said.

“Vaccination progress and higher commodity prices continue to support flows to EM. Nevertheless, rising US rates increase the risk of a taper tantrum-like episode, which could be detrimental to EM flows,” the report said.

Capital flows to the emerging markets were recovering after a difficult year, during which the pandemic tipped the global economy into its worst recession since the 1930s. However, the roll out of vaccines during the past two months of 2020 had renewed investors' interest in emerging markets.

Nearly $7.8bn or 93 per cent of the total inflows into equities went to Chinese stocks, the data shows.

Asia saw inflows to both debt and equity at $10bn and $6.8bn respectively, while in Latin America it was $1.2bn and $7.1bn, according to the IIF data. Europe and Africa/Middle East accounted for $6.1bn of inflows.

“The awakening fears of a reflationary cycle in the US, combined with the asset market rotation have capped the scale of capital inflows to EM and increased downside risk,” the IIF report said.

Inflows to emerging markets have been further encouraged by the pace of their inoculation programmes, the institute said.

India, Asia's third-largest economy, is aiming to cover 300 million of its 1.35 billion people by August as part of the vaccination drive. India has reported more than 11 million coronavirus infections and over 157,000 deaths, according to Worldometer, which tracks the pandemic. Brazil and other emerging markets are also stepping up their vaccination drives to stem the pandemic's spread.

The global economy is set to expand 5.2 per cent in 2021 after contracting 4.4 per cent last year, according to the International Monetary Fund's projections. China’s economy is expected to grow 8.1 per cent, while India will expand by 11.5 per cent.