In the run-up to the collapse of the global carry trade with its epicenter in Japan and fears about the US economy, capital flows to emerging markets remained strong and growing.
For the second consecutive month, net capital flows from non-residents to emerging markets registered a notable growth in July, which allows us to see that the ghosts of a certain reversal in the trend after the fall in May are fading away. According to the IIF survey Last month, emerging market stocks attracted around US$36.5 billion, which represents an increase of 128% compared to the previous month. This is not a minor fact, especially since it is the period preceding the recent Japanese tsunami caused by the dismantling of the global “carry trade” and fears of a recession in the US. With the July estimate, the net flow of capital from non-residents to emerging market assets accumulated so far this year exceeds US$146.5 billion.
Regarding what happened in July, the IIF, in addition to highlighting the strong increase compared to the previous three months, points out that despite the greater volatility in the market derived from political risk, uncertainty regarding monetary policy and the slow disappearance of the “carry trade”, Last month saw significant new sovereign and corporate debt issuance (particularly in emerging markets in Asia), which accounts for the bulk of this month’s flows. Thus, the IIF estimates that emerging market debt, excluding China, has shown a solid performance throughout the year, and July was no exception, reaching a total inflow of US$33.2 billion. However, clarifies Jonathan Fortun, an economist at the think tank of global banks and investors, unlike previous months, they have seen a decrease in the “carry trade”, mainly due to the strengthening of the Japanese yen. “Instead, The driving force behind the strong performance of debt in July has been new debt issuance, led by Korea, Turkey and Mexico”, he explains.
As for emerging market equities – excluding China – the IIF survey recorded inflows of US$7.1 billion, despite several episodes of market volatility. As for Chinese equities, in July there were outflows of US$900 million, which are explained “mainly by the persistent challenges that investors see in the Chinese economy.”
At a geographical level, July data shows inflows for all regions, with emerging markets in Asia leading the ranking at $21 billion.
The crisis of the rising sun
The IIF also refers to the impact of recent market turbulence, noting that it has not yet been reflected in flows. “Our data show declining returns on local currency debt, likely due to the sustained contraction in carry trade operations”they maintain. However, they maintain a positive outlook for the rest of the year, especially given the perceived consensus in the market of earlier-than-expected cuts by the Fed. Since it is known that Looser monetary policy in the US will provide a boost to emerging markets. Moreover, as inflation trends lower around the world, many emerging market central banks may find the scope to ease their monetary stances as well. As such, they believe that this potential shift could help stabilise emerging market currencies and support economic growth, as lower interest rates make borrowing more affordable and stimulate investment. Therefore, “while the immediate effects of the decline in the carry trade are negative for emerging markets, the broader trend of monetary policy easing in major economies could offer a silver lining.”
In summary, IIF calculations show that portfolio flows to emerging markets in July amounted to US$36.5 billion, with equity and debt flows of US$7.1 billion and US$29.4 billion respectively, and Chinese stocks registering outflows of US$900 million.
Source: Ambito
