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13 March 2019

Investor flows to emerging markets cool slightly after China stocks fever

After hitting all time heights in mid-February, thanks to Chinese equities attracting foreign funds, the flow of investor money into emerging markets has slowed a little recently, according to data from the Institute of International Finance.

Following crisis in Turkey and Argentina in 2018, things looked a little tougher across the emerging markets, but a dovish turn by the U.S. Federal Reserve in early February saw investors pile back into those markets. By mid-February, investor activity was hitting highs rarely seen before. As a result, major asset managers and investment banks such as JPMorgan, Citi and BlueBay Asset Management have ramped up their exposure to emerging markets in recent weeks.

Analysing high frequency data from local stock exchanges and debt offices, the IIF, which tracks capital market movements, found that flows to emerging market assets in mid-February had soared close to levels last seen late January 2018.

But flows have cooled since then, IIF chief economist Robin Brooks told Reuters:

"Flows have pulled back, including into China equities where we had seen a pick up in Q4 and around the Fed meeting," said Brooks. "You can see that equity flows in particular have pulled back after a big surge post-FOMC on Jan. 30, indicating more caution as the final trade negotiations take shape."

Much of that move has been driven by China, where foreign capital inflows into stock markets have surged in the first few weeks of 2019 as investors bet on stimulus measures from Beijing and awaited an announcement by index provider MSCI that it would increase the weighting of China A-shares in its key benchmarks at the end of February.

Taking China equity flows out of the mix, recent inflows looked a lot less dramatic, with mid-February levels coming in at around half the total enjoyed in January 2018, the IIF found. But it isn't all about China. Looking at investors' geographic preferences, data analysing average quarterly flows shows that apart from China, Indonesia has been the most popular destination for investors.

Mexico also proved enticing, though unlike other emerging markets it had some catching up to do after suffering in 2017 when its standoff with U.S. President Donald Trump over the NAFTA trade deal more than offset dollar weakness that proved a boon for emerging markets more widely.

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