The Strategist

Emerging markets are increasing investment flow

08/07/2018 - 15:41

Despite the tightening of the monetary policy of the US Federal Reserve and escalation of trade disputes, the influx of non-resident portfolio investment in emerging markets in July was positive once again and amounted to $ 11.9 billion against minus $ 10.6 billion in June, the Washington Institute of International Finance calculated. $ 7.9 billion were invested in stocks, $ 4 billion - in debt obligations. Latin America countries were leaders in terms of volume of investments attracted ($ 7.2 billion in total, mainly Mexico and Brazil), Asian countries received $ 5.4 billion. On the contrary, developing countries in Europe experienced an outflow of investments (minus $ 1 billion).

David Dixon
David Dixon
China's share in such flows keeps growing from 25% in 2010-2016 to 40% in the past two years. In part, this highlights that the Chinese financial market has been opened for foreign investors. In June, China had $ 5.3 billion in equity investments, and this was facilitated by growing use of quotations of Chinese companies in the MSCI indices. The annual inflow of portfolio investments in stocks amounted to $ 41.4 billion against $ 16 billion for the period from July 2016 to July 2017. $ 60 billion were invested in bonds ($ 9 billion over the previous period).

At the same time, the total capital flows (including direct investments, bank lending, operations of residents) in June were negative (minus $ 24 billion), after five months of inflows (data for July are still unavailable). As a result, the net inflow in the second quarter decreased to $ 11 billion against $ 118 billion in January-March, the IIF estimated. Including China, the first net outflow of funds in June amounted to $ 14.2 billion due to weakening of the Chinese currency, as well as among fears of the resumption of large-scale outflow of capital from the country. Measures to support the PRC economy will slow the outflow. At the same time, there is a danger of an additional increase in the debt burden (about 300% of GDP). Further weakening of the yuan (its rate has already weakened by more than 7% since mid-June) could also become an obstacle to the inflow of funds, the IIF expects.

In addition to China in the second quarter, the largest slowdown in inflows was observed in India, Poland, Brazil, Argentina and Turkey. In the Russian Federation, the outflow of investments accelerated in the second quarter ($ 22.6 billion against $ 11.3 billion in the first quarter), including $ 7.1 billion flowing from the country in June.