August 3, 2018 / 9:18 AM / in 3 months

Emerging market flows rebound but second quarter inflow a tenth of first quarter: IIF

LONDON (Reuters) - Investors pumped $11.9 billion into emerging stocks and bonds in July, reversing some of June’s hefty outflows, according to the Institute for International Finance (IIF).

The IIF, one of the most authoritative trackers of capital flows to and from the developing world, also said portfolio inflows to developing countries totalled just $11 billion in the second quarter, a tenth of the $118 billion received in Q1.

In a note late on Thursday, the IIF said equity flows in July had totalled $7.9 billion, of which China had received $5.3 billion. Net debt inflow amounted to $4 billion.

The July turnaround came after $24 billion fled emerging markets in June, spooked by signs of a more hawkish U.S. Federal Reserve and of growth slowdown caused by trade tensions. The June selloff came after five straight months of inflow.

The second quarter net inflow of $11 billion to developing countries compares poorly to the $118 billion received in the Jan-March period, a time when dollar weakness persuaded investors to allocate more capital to emerging markets.

The IIF said also that China, was becoming increasingly important in the flows picture, receiving some 40 percent of overall emerging market portfolio investment in the past two years, up from 25 percent in the 2010-2016 period.

“This reflects, in part, China’s gradual efforts to open its domestic bond and stock markets to foreign investors,” the IIF said, identifying MSCI’s decision to include Chinese mainland stocks into its indexes as an important catalyst.

Year-to-date Chinese equity inflows total $41.4 billion versus $16 billion in the first half of 2017, the data shows. Debt inflows so far in 2018 stand at $60 billion, from $9 billion in the same 2017 period.

“However, further yuan weakness could prove to be a significant headwind for such portfolio flows as it has in the past,” the IIF said, citing the yuan’s fall to 13-month lows amid policy easing and trade tensions with the United States.

Excluding China, however, emerging markets saw net outflows of $2 billion in the second quarter, the first net outflow since the last 2015 quarter.

The slowdown in inflow was most pronounced in India, Poland, Brazil, Argentina and Turkey, the note added.

Reporting by Sujata Rao; Editing by Jon Boyle

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