Foreigners added US$36.5 billion to EM portfolios in July, IIF says

NON-RESIDENTS poured US$36.5 billion into their emerging market stock and debt portfolios in July, a banking trade group’s data showed on Thursday (Aug 8), the largest inflows since January.

The Institute of International Finance (IIF) also said prospects for lower interest rates in the US further brightened the outlook for EM assets.

Debt issuance accounted for the bulk of the net inflows to EM portfolios last month, a total of US$29.4 billion, according to IIF data.

A further US$7.1 billion went to stock portfolios.

The combined total is more than double June’s US$17.2 billion inflow and US$4.6 billion above July 2023.

“The driver for the strong debt performance this month has been the fresh issuance of debt, with Korea, Turkey and Mexico at the forefront,” Jonathan Fortun, economist at the IIF, said in a statement.

He noted that a contraction in carry trade operations likely weighed on the performance of local currency debt as the Japanese yen, a key funding currency, rallied.

Yet the prospect of lower yields in the US is a tailwind for EM assets, according to Fortun.

“Looser monetary policy in the US will provide a boost to emerging markets,” he wrote. “As inflation trends downward across the globe, many EM central banks may find the leeway to loosen their monetary stances as well. This potential shift could help stabilise EM currencies and support economic growth.”

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Futures traders have priced in a 7-in-10 chance of a 50 basis point rate cut from the US Federal Reserve at its September meeting, according to the CME FedWatch tool. A month ago that probability was at 5 per cent.

Revised IIF data showed a small net outflow in April, leaving July as the eighth month of inflows since November.

Chinese portfolios posted a US$4.7 billion outflow in July, with stocks shedding US$0.9 billion and debt US$3.8 billion. Still, Asia led regionally with a net US$21 billion inflow.

Emerging Europe, Africa and the Middle East, and Latin America posted inflows of US$6.2 billion, US$5.3 billion and US$4.0 billion respectively. REUTERS