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Portfolio inflows to emerging markets dip 49 percent in February

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Foreign funds flows to Emerging markets (EMs) plunged 49.1 percent to $26 billion in February 2019 compared with $51.1 million attracted in January, figures from Institute of International Finance (IIF) showed.

Equity inflows to EMs in the second month stood at $14 billion, indicating 57.6 percent contraction over $33 billion recorded in the previous month.

Similarly debt inflows slumped by 33.3 percent to $12 billion as against $18 billion received a month prior.

Debt issued by sovereigns and corporates from developing economies attracted $11.8 billion, accounting for 45.7 percent of total inflows in February, with a large chunk going to Latin America and Asia.

Investors’ sentiment in EMs remains positive despite the decline in foreign inflows, said the IIF, which tracks investor flows across capital markets.

IIF, the global association of financial institutions, cited pause in hawkish policy stance of Federal Reserve, possible resolution of US-China trade spat as well as reduced concern about global growth as the factors driving investors’ positive sentiments in EMs.

After a horrid 2018, the MSCI Emerging Markets equity index gained 9 percent since the start of the year.

Of the $14 million flows in equities, world second largest economy, China, attracted $10.6 billion, representing 75.7 percent share.

“We expect flows to maintain a positive trend in coming months. While China has been driving much of the recent pick-up, we expect the pattern to broaden”, IIF posited.

Meanwhile, MSCI, leading provider of indexes announced Thursday, February 28, that it would quadruple the weighting of Chinese mainland shares in its global benchmarks in November.

The global index provider also announced that it would add Chinese mid-cap stocks to its emerging market benchmark, thereby increasing the number of Chinese constituents.

In a statement on its website, MSCI promised to increase the inclusion factor of Chinese large-cap stocks to 20 percent from the present 5 percent in two steps – May and August, 2019.

The decision was made after extensive global consultations with a larger number of international institutional investors including asset owners, managers, brokers/dealers and other market participants worldwide, MSCI posited.

MSCI said it will add Chinese A mid-cap shares including ChiNext shares to its benchmarks in November.

Upon completion, there will be 253 large and 168 mid-cap Yuan-denominated stocks, including 27 ChiNext shares, on a pro-forma basis in the MSCI EMs index. This is expected to elevate the weighting of Chinese stocks to 3.3 percent.

Analysts and investors believe that this move would drive more foreign inflows to China.

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