May saw foreign portfolio inflows into emerging markets for the seventh consecutive month as a result of investors flooding the market with bonds; but, the outlook is becoming less optimistic due to the persistence of high U.S. interest rates, according to research from a banking trade group.
Data from the Institute of International Finance (IIF), showed net non-resident portfolio flows into developing countries in May were $5.5 billion, down from an earlier estimate of $8.2 billion in April.
The gains occurred as $11.5 billion in fixed income inflows more than compensated $6.0 billion in stock outflows, with both China and non-China suffering.
According to IIF economist Jonathan Fortun, “we see a diminishing trend on the level of flows, mainly attributed to the perspective of a ‘higher for longer’ (Federal Reserve rate) and greater volatility on markets,” notwithstanding the seven-month monthly run of inflows.
Although U.S. inflation has stayed high, the country’s economy expanded more slowly in the first quarter than anticipated, which raised hopes that the Fed will drop interest rates by 25 basis points before the year is up.
However, the survey also revealed that more than four respondents still believe the Fed may decide to make either one or no cuts this year.
Some of the biggest emerging markets didn’t have a good start to June.
Unexpected election results sent markets tumbling, causing volatility spikes and sell-offs across a variety of asset classes in South Africa, India, and Mexico.
Laptops 1000The article stated that although the works might change, Chinese shares lost $0.7 billion in May.
“We see China’s stocks gaining momentum, especially if stimulus policies meet market expectations,” Fortun added.
According to Fortun, record amounts of new debt issuance may be driven by the prospect of overall sales of developing market bonds, reducing spreads, and offshore demand.
“Market appetite for local currency debt across the EM complex is still supporting the overall figure.”
