Foreign investors pulled money from both emerging market bonds and equities outside China in August, the first such outflow since March 2020, data from the Institute of International Finance showed on Wednesday.
Emerging market fixed income ex-China suffered portfolio money outflows of $2.8 billion while stocks lost $3 billion last month, the IIF report showed, as investors fretted about the Federal Reserve’s stimulus taper plans.
However, despite Beijing’s ongoing regulatory crackdown, China still attracted $10.1 billion of inflows – nearly two thirds of which went into bonds. The gains in China saw total flows for emerging market debt turn positive.
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“Throughout last month, emerging markets were focused on the risk that valuations would overreact to tapering discussions by the Federal Reserve, which may weigh on the capacity of EMs to attract foreign investment,” IIF economist Jonathan Fortun wrote in a note.
Markets in August were gyrating as signs of rising inflation numbers in the United States spurred expectations that the Fed could push forward with tapering plans at a time of slowing growth. Emerging market stocks ended August up 2.4% but only after slipping to a nine-month low.
Since then, developing stocks have risen further as the annual Jackson Hole central banks meeting and disappointing U.S. employment data have eased concerns the Fed would spring into action too swiftly.
“The buildup of inflationary pressures across the market have hurt the outlook and put focus on the capacity of policymakers on managing monetary dynamics,” wrote Fortun.
“Moving forward, with inflation in many developing nations close to peaking and positive real rates in many EMs, we see the flows perspective improving in the near future.”
Turkey goes against the current
While financial capital is gradually exiting EM ex-China, Turkey stood as an exception. After the bottom in June, Turkey attracted total financial inflows of $3.3 bn through 3 September, according to QNB Finansbank Research.
As concerns of a premature rate cut from Central Bank of Turkey dominate EM investment agenda, it is reasonable to expect some outflows until 23 September, when MPC of CB will announce its rate decision.
While currently there is no consensus poll about what Central Bank will do, PA Turkey press survey finds that opinion has shifted towards a September rate cut.
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