Emerging markets see Oct portfolio inflows but investors rethink China: IIF

EMERGING markets enjoyed in October their second strongest month of portfolio inflows this year, though China suffered another bout of outflows with investors rethinking their exposure to the country, the Institute of International Finance (IIF) said.

Overall, foreign investors added US$9.2 billion to emerging market portfolios last month, with fixed income attracting US$7.6 billion in the strongest monthly inflows this year.

However, the breakdown showed emerging markets outside China attracted US$18 billion. Meanwhile China suffered overall outflows, shedding US$1.2 billion in October from fixed income.

Chinese bond markets have suffered outflows every month since Russia invaded Ukraine in February, with outflows totalling US$105.1 billion over nine months. Chinese stock portfolios lost US$7.6 billion in October, the most since March.

Back in the first quarter, the IIF debated whether the shift to outflows from China was a tactical move linked to the Russian invasion or a shift in investor strategy.

"Increasingly, this question is being settled in favour of the latter, with market participants looking at China in a new light," said IIF economist Jonathan Fortun in a report alongside the flows data.

"This shift reflects geopolitical concerns and anxiety that the government's zero-Covid policy could weigh on China in the medium term."

China's zero-Covid approach, which is slowing the economy and fuelling widespread frustration, was deemed "completely correct" by Chinese authorities over the weekend and is not expected to be significantly revised before an annual Parliamentary session in March.

Money managers have increasingly launched emerging market or Asia investment products with no exposure to China to meet increasing demand for such strategies from global investors.

However, some asset managers have argued that beaten down Chinese assets, especially equities, are attractive.

The latest inflows failed to offset outflows suffered by emerging markets earlier in the year.

Overall emerging market bonds and stocks flows are at -US$6.2 billion for 2022, with China flows alone tearing an US$82.8 billion hole year-to-date.

IIF regional data showed an inflow of US$5.6 billion to Asia despite China's significant outflows, while Latin America took in some US$2.6 billion and emerging Europe another US$2.3 billion. The only region in the red last month was Africa and the Middle East, with US$1.3 billion in outflows. REUTERS

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