Emerging markets see capital rushing back in

Money has been returning to emerging markets at a brisk pace lately, the latest data on capital flows show.

Emerging markets equity funds recorded their first inflows in seven weeks in the week that ended on April 15. In the same week, emerging markets debt funds saw their biggest inflows in six weeks, data presented by Bank of America Merrill Lynch reveal.

Inflows into emerging markets debt represented 0.24% of assets under management (AUM) in the week, according to RBS analysis.

“In our view this improvement is primarily reflecting the effect of lower US yields as risks of a June rate hike diminish,” RBS analysts said.

Emerging Markets Inflows

Emerging markets inflows have begun again. Source: RBS

In the fixed income space, hard currency debt funds saw “impressive” inflows, of 0.58% of AUM, up from 0.22% a week ago. Local currency debt funds, however, deteriorated; they experienced outflows totalling 0.26% of AUM.

“This is representative of the local currency funds’ weak performance over the past two months, with seven weeks of outflows out of the past nine,” the RBS analysts said.

All three emerging markets main regions – Asia, emerging Europe and Latin America – saw healthy positive flows.

Emerging Europe took in inflows worth 0.29% of AUM, Latin America saw positive injections worth 0.21% of AUM, while emerging Asia attracted 0.16% of AUM.

Emerging Europe has seen the strongest inflows in the past few months, having recorded 12 weeks of uninterrupted inflows, or 2.63% of AUM cumulatively.

This is mainly due to the European Central Bank’s quantitative easing policies, which are creating conditions for economic recovery in emerging Europe because many companies from the eurozone have businesses in Central, Eastern and South-Eastern Europe.

Another advantage of ECB QE is that banks from eurozone countries – mainly Austria, Italy, Germany and France – which had been hit hard due to their exposure to emerging Europe during the crisis now benefit from much better financial conditions.

Emerging markets equities saw positive capital flows as well, with 0.12 of AUM, or $1.3 billion, flowing in.

Investors expect monetary easing in countries such as Brazil and Russia, and the stalling or even reversal of the US dollar rally, the analysts at Bank of America Merrill Lynch said.

China is a particular case among emerging market equities. Regulators have been gradually lifting restrictions from mainland investors’ access to Hong Kong shares and from foreign investors’ access to mainland Chinese shares, also known as “A-shares.”

This has sparked a wave of speculation on the part of local investors, which pushed the Shanghai Stock Exchange Composite index (SHCOMP) up by more than 100% in the past year.

In developed markets, Europe again took the lion’s share in equities, with $2 billion worth of inflows in the week that ended April 15.

Money left US stocks again, to the tune of $7.4 billion. Out of the last nine weeks, US stocks saw outflows in eight.

Unsurprisingly, despite record low or sometimes even negative yields, investment grade bond funds saw another $1.4 billion worth of inflows, marking the asset class’ 69th straight week of inflows.