In March, there was a $9.8b outflow from emerging markets

Emerging Markets securities saw suffered an outflow of $9.8 billion in March 2022, says the International Institute of Finance in its latest report.

“We estimate that EM securities suffered an outflow of $9.8 bn in March 2022, the first outflow month since March 2021 (Exhibit 1 – picture above). Foreign investment in emerging market stocks and bonds has suffered throughout the first quarter of the year.

“We see investors with higher risk sensitivity as anxiety builds over geopolitical events, tighter monetary conditions, rising inflation and fears that many economies will not recover quickly enough from the pandemic. Overall, the first quarter of the year has seen investors being more selective,” says the IIF.

One constant through all the ups and downs in capital flows dynamics of recent years has been China, which saw steady inflows as foreign investors built their exposure, even through China-specific shocks like US tariffs and the early stages of COVID.

China outflow

However, this month, the tracker shows an important outflow episode hitting China the hardest, this is an unprecedented dynamic that suggests a market rotation.

One reason capital flows into China have been so stable in recent years is that foreign investors had little exposure, in contrast to many other emerging markets. Nevertheless, this month our tracker shows outflows from both China bonds ($11.2 bn) and equities ($6.3 bn).

On the contrary, non-China EM debt attracted $8.2 bn, and EM x/China equities showed marginal outflows of $0.4 bn.

While it is premature to draw any definitive conclusions, the timing of China outflows suggests foreign investors may be re- evaluating their exposure and a rotation in preferences could start to take form.

Moving forward we see greater volatility on flows dynamics, as some countries have bottomed up and could potentially benefit from higher commodity prices but may also be greatly exposed to risk factors.

Regionally, our data shows important gains in Latam (inflows of $10.8 bn) which may be explained by the general consensus that Latam economies are posed to benefit from recent market developments.