IIF: April Global Capital Flows Back to Emerging Market Assets

Data released by the Institute of International Finance (IIF) shows that as markets recover from the sell-off triggered by the situation surrounding the Iran war, global investors have made a major return to emerging-market assets in April.

The data shows that the net flow of emerging-market portfolio funds—that is, the difference between buying and selling in the bond and stock markets—rebounded to $58.3 billion in April, essentially reversing the $66.2 billion outflow in March. At the time, the escalation of the conflict in the Middle East unsettled markets.

Unlike March’s stock market, which endured the brunt of the sell-off, April’s recovery was mainly led by fixed-income assets. After emerging-market bonds saw $682 billion of outflows in March, they attracted $51.9 billion back in April; while after stock markets saw a massive withdrawal of $655 billion in March, inflows rebounded to $6.4 billion in April.

The IIF said the data indicates that investors are willing to return quickly to emerging markets, but this does not mean that the market has fully recovered to the pre-crisis optimism that drove record capital inflows at the beginning of the year. “The capital-flow data shows that near-term financing pressures have eased somewhat, but it does not indicate that potential shocks have been fully digested.” Energy-importing countries, companies, and central banks are facing greater pressure.

Markets showing strong performance, such as South Korea and Taiwan, helped drive the MSCI 24-country emerging markets stock index. This year, in March it recorded the second-best monthly performance in nearly 20 years, and so far there are no clear signs that this upswing has noticeably slowed down.

At the same time, the trend in which investors previously demanded a much higher premium (or spread) for emerging-market government bonds relative to U.S. Treasuries has also largely reversed.

The IIF said the key issue is whether April marks the beginning of sustained normalization, or whether it is only the first easing phase after the extreme adjustment in March.

The report also highlights regional differences: the recovery mainly occurred outside China, especially in the bond market. Bond capital inflows into emerging markets outside China were close to $50 billion, higher than the $13.8 billion in March. After stock capital flows outside China saw outflows of nearly $63 billion in March, they have rebounded to $5.0 billion.

Year-to-date, capital flows in China’s bond market remain negative at $16.7 billion; meanwhile, debt capital flowing to emerging markets outside China has surged to nearly $109 billion. Latin America, one of the best-performing regions this year, attracted about $13 billion in capital inflows in April alone.

After a $6.5 billion capital outflow occurred in March in Africa and the Middle East, April saw $7.3 billion of capital return to the bond market, but part of it was offset by a further $71.3 million of additional outflows from the stock market.