Inflows into emerging markets ( EM) debt instruments helped sustain appetite in EM assets after equity flows saw a big decline that weighed on portfolio flows into developing regions.
Hot money slumped by 40 percent as Foreign investors pumped in $22.5 bn into EM in October, data from Washingtonbased International Institute of Finance (IIF).
Non- residents dump stocks in the region in favour of debt instruments but indications are that interest in EM assets remain at comfortable levels especially considering the negative FPI flow seen in August.
Debt inflows slowed by 22.8 percent to about $21.3 bn from last month while equity slumped by 88 percent to $1.2bn. The poor sentiment in EM stocks was seen outside China; while China equity flows were $2.7 bn, EM excluding China flows came in at -$1.5bn.
“Ongoing trade tensions and resulting uncertainty have impacted financial flows meaningfully… but global supply chain disruption is still limited,” IIF said in its monthly flow-tracker report. “This bounce-back in sentiment is directly explained by the “truce” in the trade conflict.”
United States and China in October agreed on the outlines of a partial trade, Bloomberg reported, as both nations begin de-escalation of a trade dispute that has dampened outlook for global growth in 2019.
Meanwhile, the IIF maintains a pessimistic outlook for equity flows to non-china EM on the heels of the large amount of hot money that has already gone to EM in recent years.
The persistent weakness of emerging market currencies to the United States Dollars (USD) another concern highlighted by the Washington-based institution.
It recalled the 2018 EM sell-off, which was owing to many different forces at work currently, including geopolitical uncertainty, weak commodity prices, and idiosyncratic difficulties.
“But perhaps the single common denominator is non-resident capital flows to non-china EM, which have been successively weaker for every Em-bullish catalyst,” IIF noted.
Despite a material Fed easing cycle EM currencies, as in the past, have remained relatively weak due to a positioning overhang that reflects a decade of strong flows due to accommodative policies in the developed markets which continues to play a heavy role.
IIF’S broader measure of net capital flows to EM (including banking and FDI flows) was -$31.4 bn in September, almost twice as large as the net outflow in the previous month. China contributed around 50 percent to the September number (-$17.3 bn).
Nigeria saw a net capital flow of $0.6bn compared to $1.3bn in the previous month. This means foreign investors’ appetite for Nigerian assets improved although at positive levels the net capital flow suggests that fewer foreigners hold Nigerian assets.