Fed, ECB encourage return to emerging markets in January: IIF

[LONDON] Foreign money flows into emerging markets bounced back in January, buoyed by the ECB starting quantitative easing and by the receding prospect of a US rate hike, the Institute of International Finance (IIF) said.

Following the sharpest outflows in 18 months in December, portfolio inflows in January were expected to tally US$18 billion, with bond investment rising to US$14 billion and US$4 billion going into stocks, the Washington-based finance industry body said in its monthly report.

"Portfolio flows have rebounded in January to more normal levels, after sizeable outflows in December," IIF chief economist Charles Collyns said in the report published late on Tuesday.

"Investor interest in emerging markets has benefited from the further scaling back of market expectations for Fed policy rate hikes and by the ECB's announcement of an expanded, open-ended quantitative easing programme."

The Fed's first two-day policy meeting of the year concludes later on Wednesday, with doubts growing about expectations that it can tighten monetary policy by mid-year.

A strengthening dollar and falling oil prices are adding to worries that inflation readings remain too low.

Low inflation supported the European Central Bank's decision last week to embark on a government bond-buying programme which will pump hundreds of billions in new money into a sagging eurozone economy.

IIF data showed the rebound did not reach all regions. The recovery was at its strongest in Latin America, followed by Asia, while foreign portfolio capital flowed out of emerging Europe for a second straight month.

In the past year, Europe recorded outflows in six out of 12 months, compared to one in Latin America and none in Asia.

REUTERS