Offshore Capital Flows to Emerging Markets hit $32bn in June, most in five months

Money taps reopened and emerging market securities attracted $32.1bn in June, a ten-fold month-to-month increase, and the highest since January, showing a continued recovery from the COVID-19 shocks. Equity and debt inflows were $ 9.5 bn and $23.5 bn, according to IIF.

“Negative sentiment on emerging markets approached extreme levels during March, setting the stage for a period of stabilization and more two-way discussions on risks and opportunities in the EM space,” said the Washington-based institution.

The IIF said sovereign issuers from most EM regions are leveraging lower costs and favorable maturities which has driven up International gross issuance meaningfully in the second quarter above average issuances of recent years.

“Thus, the level of nonresident capital inflows in June was mainly sustained by EM debt ($ 23.5 bn),” said IIF. Equity and debt inflows were $ 9.5 bn and 23.5 bn and equities in EM outside China saw marginal gains.

In May, only $ 700m of equity investment was recorded and Markets outside China suffered $4.1bn outflows while flows to Chinese equities saw a net inflow of $4.8bn.

Debt also stood at $3.5bn last month.

IIF said the shift in sentiment in June is healthy, reflecting deeply discounted valuations in many places, which means that adverse economic outcomes and weak growth are largely priced.

While EM has returned on the path of recovery, tensions between Washington and Beijing remain a downside risk ahead of the November US election. IIF said while sentiment metrics show a rebound in the outlook, hard data are still lagging behind but the ability of EM policies to catalyze a recovery remains a big consideration for outlook over the coming periods.

The global finance institute sees investors “being more discerning regarding investment decisions towards EM.”