Unlike previous months, July showed that equity outflows fed through to debt flows. “The particular feature of this month was the significant capital outflow from emerging debt, excluding China, for US$6 billion,” explains the IIF. Although China did not come out unscathed either as Chinese debt also showed outflows of around $3 billion. As for equities, emerging market stocks excluding China showed marginal inflows of $2.5bn in July. Among the factors that are attributed the greatest influence on the recent dynamics of flows, the IIF highlights the trajectory of the dollar. It is that in the first months after Vladimir Putin decided to invade Ukraine, the dollar appreciated substantially against other currencies of advanced economies, but remained within the range against that of emerging markets.
The reason the dollar failed to rise against emerging markets is that higher commodity prices buoyed commodity exporters but weighed on commodity importers. But that changed in June when a radical change came from the Fed that accelerated its cycle of rate hikes. Thus emerging markets generally suffered as tighter global financial conditions weighed on “high beta” (more volatile/risky) assets.
“Our high-frequency tracking of non-resident flows to emerging markets reflects this, with flows out of China now as negative as during the 2013 tantrum (taper tantrum) and 2015 yuan devaluation scare. These outflows they are not trivial, but they do not come close to the severity of the outflows during the first wave of covid-19”, notes the IIF.
As for what is to come, IIF analysts estimate that in the coming months several factors will influence the dynamics of flows, including the moment of peak inflation and the outlook for the Chinese economy. Another important element for the outlook will be the market’s appetite for new external debt issues. It is worth noting that net issuance has also turned negative in recent months and, looking across regions, remains positive only for the big oil exporters in the Middle East.
“We believe this reduction in flows, both in the secondary market and in primary issuance, stems from the Fed’s June hardline shift, which now sets the stage for easing in emerging markets as the Fed is close to “neutral”, reducing somewhat the urgency to raise rates further.
That said, the entity clarifies, obviously there are weak points in emerging markets, where real interest rates are deeply negative, and risks are increasing rapidly. In other words, with a certain optimistic bias, the IIF experts, while blaming Jerome Powell’s Fed for driving the sell-off in emerging markets, now suggest that with an almost neutral Fed, emerging markets can now stabilize. That is, the worst of the emerging market sell-off may be behind us. We will see.
Source: Ambito
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