Emerging markets see inflows for 7th month in May – IIF

Emerging markets extended their streak of attracting foreign portfolio inflows for a seventh consecutive month in May, Reuters reported on Thursday citing a report by the Institute of International Finance (IIF).

However, the report also cautions that persistently high US interest rates could dampen this trend.

The IIF data shows net non-resident portfolio flows into emerging markets reached $5.5 billion in May, compared to a revised $8.2 billion inflow in April.

This gain was driven by inflows into fixed income ($11.5 billion), which more than compensated for outflows from stocks ($6.0 billion). Both China and markets outside China experienced stock outflows.

Despite a seven-month streak, there is a decreasing trend in flows, noted IIF economist Jonathan Fortun. This is primarily attributed to expectations of the US Federal Reserve raising interest rates and increased market volatility.

US inflation remains high, while the economy grew slower than expected in the first quarter. This has raised expectations of the Fed cutting rates by 25 basis points twice before the end of the year.

However, a Reuters poll showed that some participants think the Fed may only cut rates once or not at all in 2024.

June began with instability for some prominent emerging markets, including India, Mexico, and South Africa. Unexpected election results triggered volatility and sell-offs across various asset classes in these markets.

Chinese equities experienced a $0.7 billion outflow in May, but the report suggests a potential turnaround. ” We see China’s stocks gaining momentum, especially if stimulus policies meet market expectations,” said Fortun.

Regionally, Emerging Europe led inflows with $6.2 billion last month, while Latin America received $1.6 billion. Africa & the Middle East, and Emerging Asia, each saw outflows approaching $1 billion.