Global investors staged a strong comeback to emerging market assets in April, reversing much of the sharp retreat seen during the previous month’s Iran war-driven market turmoil, according to data released by the Institute of International Finance on Monday, Reuters reported.
The rebound in portfolio flows suggested that investor confidence improved as financial markets stabilised following the intense volatility triggered by escalating tensions in the Middle East in March, Reuters reported.
According to the IIF, emerging market portfolio flows — which track net buying and selling in equity and debt markets — recovered to $58.3 billion in April after witnessing outflows of $66.2 billion in March.
The turnaround was largely driven by debt markets. Emerging market bonds attracted $51.9 billion in inflows during April, sharply reversing the $68.2 billion outflow recorded in March, Reuters reported, citing IIF data. Equity inflows also returned to positive territory at $6.4 billion after investors pulled out $65.5 billion from emerging market stocks during the previous month.
The IIF said the swift return of capital indicated that investors were willing to re-enter emerging markets once immediate stress conditions eased. However, the institute cautioned that the recovery should not be interpreted as a complete restoration of the optimism that had fuelled strong inflows earlier this year.
The news agency added that the IIF highlighted continued vulnerabilities stemming from higher energy costs and pressure on energy-importing economies, companies and central banks.
Emerging market equities have remained resilient despite geopolitical uncertainty. Strong performances in markets such as South Korea and Taiwan helped MSCI’s emerging market stock index deliver one of its strongest monthly gains in nearly two decades in March.
Investor risk appetite also improved in sovereign debt markets, with spreads on emerging market government bonds over U.S. Treasuries narrowing significantly after widening sharply during the March selloff.
The IIF noted that the key challenge now was determining whether April’s recovery represented the beginning of a durable normalisation in capital flows or merely an initial relief rally following the severe market adjustment witnessed in March, Reuters reported.
The report further pointed to significant regional divergence in flows, with much of the rebound occurring outside China. Debt inflows into emerging markets excluding China climbed to nearly $50 billion in April from $13.8 billion in March. Equity flows outside China also recovered to $5 billion after suffering outflows of almost $63 billion in the previous month.
On a year-to-date basis, debt flows into China remain negative at $16.7 billion, while emerging markets outside China have attracted nearly $109 billion in debt inflows so far this year.
Reuters reported that Latin America emerged as one of the strongest-performing regions, drawing $13 billion in inflows during April alone.
Meanwhile, the Africa and Middle East region also saw improved investor sentiment, with debt markets receiving $7.3 billion in inflows after suffering $6.5 billion in outflows in March. However, equity markets in the region continued to face pressure, recording an additional $713 million in outflows.
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