Investors pull out of emerging market stocks and bonds

Emerging market stocks and bonds saw an outflow of $4 billion in June, marking the fourth straight month of outflows, amid growing worries about a global recession and inflation, the Institute of International said. Finance in its last report.

Outflows were $4.9 billion in May, $4 billion in April and $9.8 billion in March, compared to inflows of $17.6 billion and around $1.1 billion. dollars in February and January, respectively.

Regionally, gains were only recorded in Latin America, which recorded inflows of $5.7 billion, with all other regions showing outflows.

“The growing risk of a global recession weighs on emerging market flows as anxiety grows over geopolitical events, tighter monetary conditions and realized inflation. Continued equity market volatility has significantly hurt the outlook,” said the IIR.

Fears of a recession have grown steadily amid growing inflationary pressures, sharp interest rate hikes by central banks and the war in Ukraine.

Soaring oil and gas prices, exacerbated by Russia’s war in Ukraine, fueled already rising inflation.

For 2022, inflation is forecast at 5.7% in advanced economies and 8.7% in emerging and developing economies, according to the International Monetary Fund.

Last week, the IIF warned that the risk of a global recession is “rising sharply” amid a combination of “shocks” including the impact of the Russian-Ukrainian conflict on the eurozone, uncertainty related to the Covid-19 pandemic in China and the sharp tightening of financial conditions in the United States.

The global economy is expected to grow 2.3% in 2022, down from an earlier estimate of 4.6%, the IIR said in a May 26 report.

The World Bank has cut its growth forecast for the global economy for the second time this year following the war in Ukraine, lowering its estimate for 2022 to 2.9% from the 3.2% projection that ‘it had released in April, and the 4.1% projection estimate made in January.

The IMF also lowered its growth forecast for the global economy to 3.6% in 2022 and 2023.

“We are in a global shock of interest rates and high inflation. Yields on longer-term government bonds have risen sharply in advanced economies, tightening financial conditions, weighing on growth and increasing the risk aversion,” the IIR said.

“This mechanism weighs on flows to emerging markets. We see that the current exit episode is of a similar magnitude to RMB [Chinese yuan] fear of devaluation in 2015 and 2016.

The IIF also found that foreign investors poured more capital into Chinese equities but reduced their holdings of bonds, a trend opposite to that in other emerging markets.

China’s stock market saw foreign inflows of $9.1 billion, while emerging market stocks saw outflows of $19.6 billion, data tracker IIF showed.

Meanwhile, the Chinese debt market saw $2.5 billion in outflows last month, while emerging markets received inflows of $9.1 billion, helped mainly by resilient interest in bonds. of companies.

The Chinese government’s implementation of a strict ‘zero-Covid’ policy to keep the virus at bay has dealt a severe blow to the economy, with major cities like Shanghai locked down for weeks and restrictions in many other places cutting spending, closing factories and blocking supply chains.

“For the coming months, several factors will influence the dynamics of flows, among which the timing of the peak of inflation and the outlook for the Chinese economy will be the focus,” the IIF said.

“Despite recent readings, we remain constructive as most major emerging markets have started to climb [interest rates] well ahead of advanced economies, which now leaves real longer-term interest rates in many emerging countries well above their G10 counterparts,” he said.

This provides some protection against the current global interest rate shock, he added.

However, there are “clearly pockets of weakness in emerging markets” – where real interest rates are deeply negative – and the risks for these countries are growing rapidly, the IIF said.

Updated: July 08, 2022, 05:30

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