Emerging markets register nine-fold rise in capital inflows in June

Flows to emerging markets rose to $32.1bn last month, the Institute of International Finance says

People in a screening queue outside a mall in Beijing. US-China tension is weighing on sentiment about emerging markets. AP

Capital flows to emerging markets securities jumped more than nine-fold in June to $32.1 billion (Dh117.9bn), up from $3.5bn in May, according to the Institute of International Finance.

“Negative sentiment on emerging markets approached extreme levels during March, setting the stage for a period of stabilisation and more two-way discussions on risks and opportunities in the [emerging market] space,” Jonathan Fortun, an IIF economist, said in the institute’s latest Capital Flows Tracker report.

Debt flows represented $23.5bn of the June total, according to IIF data on non-resident portfolio flows to emerging markets.

“Debt flows continued their recovery, at a healthy pace ... On the equity side, the negative trend which we observed last month was reversed,” Mr Fortun said.

Equity inflows amounted to $9.5bn last month, the report said.

Reversing an outflow trend, net inflows to emerging markets, excluding China equities, amounted to $3.4bn, while inflows to China were valued at $6.1bn.

At a regional level, emerging Asia attracted the most capital, registering inflows of $17.1bn in June, followed by Latin America with $7.3bn.

Debt issuance picked up “meaningfully” in the second quarter of the year and exceeded the average of recent years.

This comes as sovereign issuers from most emerging markets regions leverage lower costs and favourable maturities, the IIF said.

“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.

“We are starting 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,” he said.

However, the ongoing tension between Washington and Beijing is weighing on confidence in emerging markets before the US elections in ­November.

While sentiment metrics show a rebound in the outlook, hard data still lags behind, the report said.

The institute said the shape of the recovery will be depend on the ability of emerging markets to put in place efficient policies to bring about a recovery.

“Moving forward, we see investors being more discerning regarding investment decisions towards [emerging markets],” Mr Fortun said.

The coronavirus pandemic has infected more than 11 million people and killed more than 525,000 around the world, according to Johns Hopkins University. About 5.86 million people have recovered.

The International Monetary Fund projects that the global economy will contract by 4.9 per cent this year, 1.9 percentage points below its April forecast, due to a worsening economic fallout from the pandemic.

It expects the world economy to rebound by 5.4 per cent next year.

As governments imposed movement restrictions to curb the spread of the virus, economic output plunged, sending financial markets into a tailspin and affecting travel, trade and daily life.

However, economies in Europe, Asia, the Middle East and North America have gradually begun to reopen four months after the World Health Organisation declared the Covid-19 outbreak a pandemic.

Purchasing managers’ indexes for June signalled that a manufacturing rebound is under way in emerging markets, Bloomberg reported.

Even though most countries are still in the contraction zone, with PMI readings that are below 50, the scale of improvement in May suggests economic activity is picking up.

However, some countries are experiencing a surge in infections, particularly in Brazil and India. The US has about 2.8 million infections, the highest worldwide, and more than 129,000 deaths.