Emerging markets see 5 months of strongest foreign investor run since 2015

Emerging markets see 5th month of strongest foreign investor run since 2015

Emerging markets saw a fifth straight month of net 'non-resident' portfolio inflows in April, their best run since the first half of 2015, data from the Institute of International Finance (IIF) showed on Tuesday.

The gauge of foreign investor appetite showed that April was the third month running that inflows topped $20 billion, making it the strongest three-month streak since 2014, helped by record dollar-denominated emerging market debt issuance.

Not all the signals were strong, however. Overall net flows, which take into account selling and buying of both foreign and domestic investors, declined to $18.7 billion from $30 billion, excluding China, marking the weakest quarter since early 2014.

Net capital flows to China slipped back into the red too, with modest outflows of $6.3 billion in March. This took outflows to $28.8 billion in first quarter 2017, although this was still 75 percent below the average quarterly outflows of $115 billion in 2014-2016.

"Given the strong recovery in non-resident portfolio inflows in Q1, the slowdown in net capital inflows suggests that FDI flows and cross-border bank lending to EMs have been subdued this year," the IIF said.

"In addition, a rise in resident outflows appears to be an important factor behind the retrenchment, particularly for those countries facing political uncertainty."

Looking at just the foreign investor data, inflows into bonds and other forms of debt were double the pace of the inflows into equities.

"The perception that Fed tightening will remain gradual has been a key support for capital flows from low-rate mature markets to higher yielding emerging markets," the IIF said.

Regionally, emerging Asia attracted $16.3 billion combined equity and debt inflows, followed by emerging Europe at $2.3 billion. Africa and the Middle East gained $1.6 billion.

Latin America was nearly flat at $400 million with the IIF saying investors were taking a "wait and see" approach ahead of potential U.S. policy changes under President Donald Trump, which could affect the region.

But with growth gaining momentum, Brazil and India saw the biggest individual inflows.

Turkey saw net inflows of $5.6 billion in the first quarter, well below the levels in the same period in 2016. This is a potential source of concern, the IIF said, given the scale of Turkey's external financing needs in 2017, which is 28 percent of GDP.

Despite domestic political uncertainties, flows to Indonesia remained robust against a backdrop of prudent macro policies and reforms. In contrast, Poland, Mexico and Russia saw net capital outflows.