Foreing Portfolio EMs turn negative in August, IIF

Turmoil on the world’s financial markets has hit foreign portfolio investment flows to emerging markets (EMs), which turned negative this month for the first time in 2015 according to estimates by the Institute of International Finance.

Aversion to EM risk was strongest in equities. The IIF expects outflows by cross-border equity investors to total $8.7bn in August, after outflows of an estimated $100m in July and inflows of $800m in June.

Flows to EM bonds remained positive in August at $4.2bn, after $6.2bn in July and $3.3bn in June. But the IIF said 7-day and 28-day moving averages of flows for both asset classes turned negative in the month.

 

On August 24 alone — the last day for which it collected data

— the IIF said outflows from the seven countries it monitors on a daily basis totaled $2.7bn, the same as it recorded for September 17, 2008, during the week of the Lehman Brothers bankruptcy.

It said cross-border flows to EM assets averaged just $3bn a month during the past four months, compared with an average of $22bn a month from 2010 to 2014.

Robin Koepke and Scott Farnham, authors of the IIF’s Portfolio Flows Tracker, wrote: “Since peaking at the end of April, the MSCI EM [equities index] has dropped 27 per cent in dollar terms, implying a technical bear market, as weak commodity prices and ties to China have weighed on key EM equity markets, already edgy in anticipation of Fed lift-off.”

China’s devaluation on August 11 had triggered broad-based market volatility, EM currency depreciation and widespread selling of EM equities, they noted.

EM bonds have held steadier during the recent turmoil than equities and currencies. Koepke said reduced expectations that the US Federal Reserve would begin raising interest rates in September had acted as a stabiliser and “seem to have cushioned the decline in EM bond flows.”