EM Portfolios Funnel near US$45Bn in August, but Cracks are Showing, IIF says

• Investors ploughed nearly US$45Bn into their emerging market (EM) equities and debt portfolios in August, the most in nearly a year, but a large outflow from EM stocks outside of China pointed to a change of sentiment among investors, according to a report from a banking trade group.
• The US$44.8Bn net inflow for last month compares with $38.1Bn in July, which was sharply revised lower from US$55.5Bn, and compares favourably with US$28.2Bn in August 2024, according to data from the Institute of International Finance (IIF).
• Chinese debt and stocks took in over US$39Bn net last month, while ex-China debt attracted US$13.2Bn. Stocks outside of China saw a US$7.4Bn outflow after three months of inflows. The shift "marks the weakest month for EM equity flows since the (Northern) spring and reflects a significant reversal in sentiment toward ex-China markets," Jonathan Fortun, senior economist at the IIF, wrote in a statement published alongside the data.
• Yet an external tailwind could give EM assets support, as cooler-than-expected U.S. inflation data cemented expectations that the Federal Reserve will cut borrowing costs following its meeting next week. Lower rates in developed economies help funnel investments into EMs that offer higher yields.
• Asia attracted US$18.1Bn, while Latin America added US$8.9Bn, partly boosted by debt flows to Mexico and Brazil, according to the report. EM Europe added US$8.7Bn, and the Middle East and North Africa US$5.8Bn more, the IIF data showed.
• "All (regions) posted higher inflows than the previous month, yet the underlying pattern still reflects the outsized role of China in portfolio allocations," Fortun wrote. August marked the largest inflow to Chinese equities since February. “Investor positioning appears increasingly sensitive to headline risk and policy noise, especially in economies exposed to external shocks or electoral cycles,”.

(Source: Reuters)