Portfolio flows to emerging markets slow to USD 22 billion in February, says IIF

NEW YORK – Foreign investors sharply slowed their purchases of emerging market assets in February to below USD 22 billion even as flows remained positive across both debt and equities, data from a global banking trade group showed on Tuesday.

Non-resident investors added a net USD 21.7 billion to emerging market portfolios last month, a sharp decline from January’s record USD 100.5 billion and below the USD 45.5 billion recorded in February last year, the Institute of International Finance said.

The slowdown followed an unusually strong start to the year rather than a more fundamental shift in investor appetite, said Jonathan Fortun, senior economist at the IIF.

“The month-to-month slowdown is … best read as a normalization after an outlier January print,” he said in the IIF report.

Foreign investors allocated a net USD 14.3 billion to emerging market debt last month, while equity inflows slowed to USD 7.4 billion from USD 28.0 billion in January.

The February data predates a deterioration in global risk sentiment triggered by the US-Israeli war on Iran whose spread in the Middle East has prompted a retreat from emerging markets and other risk assets in the first days of March.

South Korea, which the IIF highlighted as an area of weakness in February flows, has since seen particularly steep equity losses even though the benchmark KOSPI remains strong on a year-to-date basis.

ASIA LEADS FEBRUARY DEBT INFLOWS

Debt inflows in February were spread across regions. Asia drew USD 5.9 billion, followed by Latin America with USD 4.3 billion, emerging Europe with USD 2.6 billion and the Middle East and North Africa with USD 1.5 billion.

China’s debt market attracted USD 400 million in February after stronger inflows in January, while emerging markets outside China received USD 13.8 billion.

The IIF said that pattern suggests investors remain interested in higher-yielding markets outside China, even as conditions in global markets become less predictable.

Equity flows also stayed positive last month, although the regional picture was uneven.

China stocks sucked in USD 5.2 billion while emerging markets outside China added USD 2.2 billion. Across regions, Latin America led allocations with USD 6.9 billion, while emerging Europe, the Middle East, and North Africa also saw smaller inflows.

Asia equities overall recorded net outflows as selling in markets such as South Korea offset inflows elsewhere.

“In this environment, flows are likely to remain broadly resilient but increasingly differentiated, with balance sheet strength, policy credibility, and market depth playing a growing role in shaping investor allocation decisions,” Fortun said.

Local currency bond markets continued to attract buyers as investors sought relatively high yields in countries where exchange rates and policy settings have remained broadly stable. A weaker dollar earlier in the year has also helped support returns across both local- and foreign-currency debt.

Even with steady inflows, February also showed that investors remain selective in how they allocate capital across emerging markets, the IIF said.

Late last month, Indonesia experienced a sharp bout of outflows from both equities and sovereign bonds after domestic market concerns. The IIF said the episode remained localized and did not spread across other emerging market assets.

(Reporting by Rodrigo Campos in New York, editing by Karin Strohecker and Alexander Smith)