In the run-up to the US elections, global investors had taken a break last October, perhaps waiting for the outcome of the presidential elections, and so Portfolio flows to emerging markets had shown an abrupt stop that implied a positive net balance of US$1.9 billion, due to strong capital outflows of more than US$25.5 billion.
According to the IIF survey, this seems to have been strongly reversed since The survey on non-resident portfolio flows to emerging markets recorded a net inflow of US$19.2 billion last November, highlighting the divergence between the equity and debt markets.
Given that on the one hand, emerging market debt instruments attracted substantial entry of US$30.4 billion, highlighting the persistent pursuit of performance amid global uncertainties. On the contrary, the Emerging equity markets experienced a notable outflow of US$11.1 billionwhich reflects the fragility of investor sentiment in the face of evolving political and economic contexts.
Therefore, although the US elections and their consequences cast a shadow over global markets, profoundly influencing the dynamics of capital flows in emerging countries, “November flows were determined by market reactions to the election results and the political implications of the new administration. The strengthening of the dollar after Donald Trump’s victory further contributed to this dynamic,” they explain from the IIF.
In this regard, it is worth noting that although the appreciation of the dollar against emerging currencies was not as pronounced as that observed during Trump’s first election in 2016, it did put pressure on emerging market assets. “A stronger dollar increases the cost of servicing dollar-denominated debt for emerging market borrowers and may trigger capital flight,” says Jonathan Fortun, economist at the IIF.
It turns out that market expectations suggest that the Fed may be forced to moderate its easing cycle in response to possible inflationary pressures arising from the fiscal and trade policies projected by the new Trump administration. “This recalibration of monetary policy could have implications for emerging market flows, as a less accommodative stance from the Fed may diminish the relative attractiveness of emerging market assets.”warns Fortun.
Flows at the regional level
Analysis of flows by region reveals a surprising dichotomy. On the one hand, the Chinese stocks continued their downward trajectory and recorded a capital outflow of US$5.8 billion, which prolonged the trend observed in October. For the IIF, this sustained pessimism around Chinese stocks is rooted in a confluence of factors, including the regulatory concerns, slowing economic growth and persistent geopolitical tensions. It is worth noting that emerging market stocks, excluding those in China, also experienced capital outflows, totaling $5.3 billion.
Now, contrary to the weakness of equities, the emerging debt markets showed resilience. Chinese debt flows saw an outflow of $7.5 billion, but this was more than offset by a solid inflow of $37.3 billion in emerging market debt excluding China, according to IIF data.
For Fortun, this strong performance in emerging debt markets is supported by a combination of factors, including Investors’ continued search for yield in an environment of low interest rates and the relative stability that fixed income assets offer compared to stocks.
“This resilience is particularly evident in the carry trade, which is set to be a key driver of returns on emerging market dollar debt. The carry, which represents the income generated by bond interest payments, is expected to generate strong returns for investors in 2025, adding to its already substantial contribution to 2024 performance”, explains the IIF economist.
However, in addition to the “carry”, the dynamics of “duration” (the sensitivity of bond prices to changes in interest rates) It will also play a crucial role in shaping emerging debt returns.
In this framework, Latin America attracted the largest capital inflow with US$6.5 billion, while the emerging markets of Europe received US$4.8 billion. The emerging markets of Asia experienced a capital inflow of $4.6 billion and Africa and the Middle East saw the smallest inflow at $3.4 billion.
The November balance showed a net flow of US$19.2 billion, where equities experienced a net outflow of US$11.1 billion and fixed income a net inflow of US$30.4 billion. While Chinese stocks recorded outflows of US$5.8 billion.
Flows: 2025 perspectives
“While duration has been a drag on performance in 2024, forecasts indicate a possible shift towards a positive contribution in 2025, as US Treasury yields are expected to decline”says Fortun.
Additionally, the outlook for emerging market local currency debt also appears promising, with projections suggesting the potential for positive total returns in 2025. This resilience stems from the strong carry generated by these instruments, which is anticipated to exceed the possible headwinds from currency fluctuations and interest rate adjustments.
Even if carry generation moderates to pre-pandemic levels, it is still projected to contribute significantly to overall returns in this asset class.
As such, the outlook for emerging market flows remains intrinsically linked to the global macroeconomic and geopolitical landscape. “The outcome of the US elections and the political direction of the new administration will continue to impact the markets. The potential for a change in the Fed’s monetary policy stance, driven by expectations of fiscal stimulus and changes in trade policy, adds another layer of complexity to the outlook. While emerging debt markets are expected to benefit from the search for yield and the appeal of high value-added assets, emerging equity flows will likely face headwinds unless stability returns to key markets, in particularly China”, they anticipate from the IIF.
Source: Ambito
I am Pierce Boyd, a driven and ambitious professional working in the news industry. I have been writing for 24 Hours Worlds for over five years, specializing in sports section coverage. During my tenure at the publication, I have built an impressive portfolio of articles that has earned me a reputation as an experienced journalist and content creator.
