Against all odds, the international investors took risks again by betting on emerging market assets last June when several election results In the emerging world, especially in Mexico, India, and South Africa, doubts were raised. There were more than $16 billion, According to estimates by the Institute of International Finance (IIF), which implies an increase of almost 193% compared to the previous month and thus marks the eighth consecutive month of net inflows of funds into emerging markets.
Monitoring of capital flows to emerging markets from non-resident investors by the influential IIF projects that In June, they attracted around $16.1 billion.
The raw data shows that there was an overall inflow, excluding China, of $12.1 billion into emerging market debt while emerging market equities, excluding Chinese stocks, attracted $6.3 billion.
Despite the good performance of positive net flows towards emerging assets, he think tank of international banking remains cautious and not so optimistic. “Although the trend of positive flows continues, we see a downward trend in the level of flows, mainly attributed to the prospect of a Federal Reserve (Fed) with higher interest rates for longer, which impacts the dynamics of the dollar, the outlook for the global economy and has a great influence on financial markets,” warns the IIF.
Strong dollar impacted emerging markets
In relation to the emerging market debtexcluding China, the IIF believes has shown a solid performance throughout the year, capping the first half with a total inflow of $12.1 billion in June. “In 2024, the main force behind the performance of hard currency debt of thes emerging markets is the carry trade, and coupon income is expected to reach exceptionally high levels of profitability,” explains Jonathan Fortun, an economist at the IIF.
It is worth noting that this performance is closely linked to US financial conditions and the Fed’s policy decisions, and now Geopolitical risks are expected to increase significantly towards the end of the yearwhich keeps the economic outlook uncertain.
The IIF survey shows that the combination of increasing returns and A stronger dollar caused losses on local currency emerging market debt, China, Mexico and South Africa stand out as the largest nations reporting positive returns. Fortun notes that this scenario so far underscores the strong correlation between emerging market debt in local currency and US Treasuries, highlighting their susceptibility to rate fluctuations.
In this regard, he adds that, despite a less favorable short-term outlook due to the Fed’s less accommodative stance, There is some comfort in the apparent reluctance of the US central bank to implement new rate hikes. Of course, this relationship between emerging market currencies and The Fed’s decisions are crucial.
It should therefore be kept in mind that higher rates tend to strengthen the dollar, reducing the attractiveness of emerging market currencies, which can lead to capital outflows and higher borrowing costs for emerging markets. This is something that the Argentine economic team should take into account when designing the monetary and financial programme, and if it renegotiates with the International Monetary Fund (IMF).
But on the contrary, any indication by the Fed of a slower pace or a pause in rate hikes could relieve some pressure on emerging market currencies, This could attract investment back to these markets and improve the outlook for emerging market debt. In other words, countries like Argentina are in the hands of the Fed, especially if it wants to return to the international voluntary debt market.
How dollar flows worked country by country
Regarding the flows attracted by emerging market stocks, excluding those from China, according to the IIF, capital inflows of $6.3 billion were recorded, despite the Fed’s tougher stance. Stock markets have performed positively in June, although Chinese stocks have seen capital outflows of $1.3 billion.
“For June, our data show large capital inflows into emerging markets in Asia of $15.1 billion, while all other regions experienced marginal movements,” the IIF said.
Regarding the immediate future, IIF analysts believe that there continues to be a significant risk to the outlook, mainly related to a further escalation of geopolitical conflicts, the return of inflation peaks and the resulting more aggressive stance of the Fed.
The balance of the first half of the year shows that Emerging markets have received a positive net inflow of funds of more than $110 billion.
Source: Ambito
