Emerging markets (EMs) are feeling the backlash of dampened investor sentiment amid lingering trade crisis between the United States and China as hot money to EMs dipped nearly by half in July.
Since the trade crisis escalated last Thursday (August 1), $6.8 billion in hot money has left EMs, according to Washington-based Institute of International Finance (IIF), with reversal of capital flows being broad-based.
Figures from IIF showed that capital worth $24.3 billion made its way into EMs in July, 41 percent lower compared with $40.9 billion recorded in June.
“Arguably the biggest reason for the pullback in EM assets, especially equities, has been due to the trade spat,” said Emmanuel Noko, economist at M&C Research Institute.
“What is happening is that investors are pulling funds out of risk assets to riskless assets, causing more woes for EMs,” Noko added.
Hot money or portfolio investment is the entry of funds into a country where foreigners deposit money in a country’s bank or make purchases in the country’s stock and bond markets, sometimes for speculation.
Stocks suffered the worst hit as equity flows to EMs plunged some 91 percent to $1.2 billion in July, even as debt flows were down some 19 percent.
The fact that EM stocks and bonds attracted positive but relatively modest, non-resident flows in July reflects foreign investors’ expectation of a dovish shift from United States’ Fed prior to its July meeting, but the impact of a loosening stance was outweighed by the on-going trade dispute, analysts at IIF said.
The dynamics of flows sharply contrasted between equity and debt. While Chinese stocks saw an inflow of $2.7 billion, dampened global demand and weaker industrial output saw an outflow of $1.5 billion from non-China EMs.
A quick check on Morgan Stanley Capital International (MSCI) EM index, a gauge of equity market performance, showed stocks are headed to their lowest level in seven months, after trade tension between the world’s two economic powerhouses took another dimension.
Debt flows were $23.1 billion last month, $5.1 billion less than $28.2 billion attracted in June. Bond flows have also weakened across EM albeit at slower pace than equities, with South Africa leading the pack of net outflows with over $600 million in the previous week.
Moreover, weak growth forecast and issues with its state-owned electricity company (Eskom), which continue to threaten debt sustainability dampen investor sentiment on Africa’s second-largest economy.
Despite a sharp outflow cycle suffered in India, which saw foreign investors pull out capital worth $1.7 billion, flows to EM Asia stood positive at $3.6 billion.
The distribution of debt flows into EMs was broadly shared, with strong inflows to EM Asia ($13.1bn), Africa and Middle East ($2.1bn), among others.
Meanwhile, net capital outflows from EMs worsened to $35 billion in June from $19 billion in the preceding month, spurred by China and Saudi-Arabia.
For Nigeria, net capital flows sank to a deficit of $300 million in June from a surplus of $700 million in the preceding month, implying that the country is investing more abroad than the world invests in it.
The World Bank has said that investment growth in emerging markets will slow to 3.9 percent by 2019-end from 4.2 percent in 2018, citing weak global growth, structural lapses and rising debt profile as threats to EMs’ investment prospects.
