The Strategist

Portfolio investment flows accelerated in May

06/06/2018 - 16:31

The outflow of portfolio investments from emerging markets has accelerated sharply in May to $ 12.3 billion from $ 0.3 billion in April, the Washington Institute of International Finance (IIF) calculated. The funds were flowing out of stocks and bonds in equal shares; this trend mainly affected the Asian countries (minus $ 8 billion) and the countries of Africa and the Middle East (minus $ 4.7 billion). The IIF indicates that the current period of a consistent outflow of funds is the longest period after the seven-week withdrawal of capital that was observed after the victory of Donald Trump in the US presidential elections.

At the same time, the net inflow of capital into emerging markets in April (data for May is unavailable so far) remained high and amounted to $ 32 billion (an average of $ 7 billion per month in 2017). For January-April, this inflow was $ 110 billion compared to $ 37 billion a year earlier (for comparison, the inflow of portfolio investments since the beginning of the year was $ 46 billion compared to $ 134 billion in the same period last year). The largest inflow was observed in China (plus $ 21 billion in April and $ 53 billion since the beginning of the year). The flows were also positive for Turkey and Mexico, while capitals flowed from India, Argentina, and Poland.

Among the reasons for the May outflow, experts cite financial problems in Argentina and Turkey strengthening the dollar and raising rates in the US, as well as strikes in Brazil, risks of trade protectionism, political uncertainty in Italy and Spain. At the same time, the institute notes that the growth rates of the economies remain high, and the value of assets after adjustment is attractive to investors. "Non-portfolio flows (including both bank loans and direct investments, as well as residents' operations) largely offset the outflow of portfolio investments," the IIF said, indicating that a slowdown in yield growth for 10-year US securities could also support emerging markets. However, the growing instability in the markets can once again spur the demand for dollar assets. A ten percent strengthening of the US currency, taking into account the volume of currencies in trade, will reduce net inflow to emerging markets by about $ 95 billion, the IIF believes.