Emerging market (EM) stocks and bonds recorded an outflow of $9.8 billion in March, the first outflow month in a year, as concerns over geopolitical events, inflationary pressures and economic recovery from the pandemic dampened the outlook for investors.
That compares with an inflow of about $17.6bn in February and roughly $1.1bn of flows in January, according to the Institute of International Finance (IIF).
Foreign investment in EM securities "suffered" throughout the first quarter of the year, with the outflow in March driven by China, the IIF said in its monthly Capital Flows Tracker report.
Outflows were recorded from both bonds ($11.2bn) and equities ($6.3bn) in China, while non-China EM debt attracted $8.2bn.
"One constant through all the ups and downs in capital flows dynamics of recent years has been China, which saw steady inflows as foreign investors built their exposure, even through China-specific shocks like US tariffs and the early stages of Covid," IIF said.
"However, [in March], our tracker shows an important outflow episode hitting China the hardest. This is an unprecedented dynamic that suggests a market rotation."
Foreign investors are being "more selective" with "higher risk sensitivity as anxiety builds over geopolitical events, tighter monetary conditions, rising inflation and fears that many economies will not recover quickly enough from the pandemic", the institute in Washington said.
The Russia-Ukraine crisis has pushed global oil prices to multi-year highs, raising transport costs, worsening already high inflation levels and denting the tentative growth of a global economy that was newly recovering from the Covid-19 pandemic, potentially tipping some countries into a recession.
Inflation in the Organisation for Economic Co-operation and Development (OECD) area, which includes the US, UK, Japan and Australia, among others, rose 7.7 per cent annually in February, reaching its highest rate since December 1990.
While rising energy costs continued to boost inflation in a majority of OECD countries, food prices also saw a notable spike, the organisation said.
Annual inflation among G20 members (including EU states and countries such as China, India and Saudi Arabia) also rose in February to 6.8 per cent, compared with 6.5 per cent in January.
Meanwhile, overall economic growth in the East Asia and Pacific is projected to slow to 5 per cent in 2022 — 0.4 per cent less than expected in October — due to the Russia-Ukraine conflict, the World Bank said on Tuesday. If global conditions worsen and national policy responses are weak, growth could slow to 4 per cent.
China, which accounts for 86 per cent of the region's output, is projected to grow 5 per cent in the baseline and 4 per cent in the downside scenario, the lender said.
One reason capital flows into China remained "stable" in recent years is that foreign investors had little exposure, in contrast to many other emerging markets, IIF said.
"While it is premature to draw any definitive conclusions, the timing of China outflows suggests foreign investors may be re-evaluating their exposure and a rotation in preferences could start to take form," it said.
One region which saw strong gains in March was Latin America, with inflows of $10.8bn, as its economies are expected to "benefit from recent market developments", IIF said.
"Moving forward, we see greater volatility on flows dynamics, as some countries have bottomed up and could potentially benefit from higher commodity prices but may also be greatly exposed to risk factors."