EM investment inflows total $5.5bn in May, yet trend wanes: IIF

June 07, 2024 (MLN): The Institute of International Finance (IIF) estimates that Emerging Markets (EM) attracted around $5.5 billion in May 2024, marking the seventh consecutive month of overall inflows across the EM complex.

However, the institute sees a diminishing trend in the level of flows, mainly attributed to the perspective of a “higher for longer” Fed and greater volatility in markets.

Similar to last month, EM excluding China equity has seen outflows ($5.3 bn), the more hawkish stand by the Fed, and the prospects of a looser monetary stance disappearing have made a dent on the performance of equity markets in EMs.

China equities have followed the same path and May saw small outflows in this category too ($0.7 bn).

Having said that, the institute foresees China’s stocks gaining momentum, especially if stimulus policies meet market expectations.

EM excluding China debt has seen the largest gains this month, sustained mainly by a positive impact from carry trade, totaling around $10.2bn.

However, it still sees narrowing spreads and off-shore demand driving fresh issuance of debt to record levels, an impressive effect despite the high cost of debt.

Moreover, market appetite for local currency debt across the EM complex is still supporting the overall figure.

China's debt flows show marginal gains, amounting to $1.3bn.

The entity maintains its hypothesis of flow performance for the coming months.

Emerging market currency returns will remain closely linked to the US economy.

Nevertheless, a “higher for longer” monetary stance by the Fed (as confirmed by recent inflation readings in the US) would mean that the expected large inflow may not materialize or may be smaller than expected.

A great amount of risk in the outlook remains, mainly related to further escalation of geopolitical conflicts, the return of inflation spikes and the consequent more hawkish stance of the Fed.

For May, their data shows marginal inflows for EM Europe ($6.2bn) and Latin America ($1.6bn) with all other regions suffering outflows. 

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