Emerging market stocks and bonds suffer $4.9bn outflow in May

Foreign investors are concerned about a global recession, geopolitical events and inflation, IIF says

Shanghai. China attracted $2.7 billion worth of capital flows in May, according to the Institute of International Finance. Reuters

Emerging market stocks and bonds recorded an outflow of $4.9 billion in May as concerns about a global recession, geopolitical events and inflationary pressures weighed on investors’ outlook, according to the Institute of International Finance.

That comes after an outflow of $4bn in April and $9.8bn in March, compared with inflows of $17.6bn and about $1.1bn in February and January, respectively.

However, emerging market countries in Europe, Africa and the Middle East recorded marginal gains with inflows of $3.5bn and $2.7bn, respectively, the IIF said in its monthly Capital Flows Tracker report.

“Mounting global recession risk is weighing on EM flows as anxiety builds over geopolitical events, tighter monetary conditions, realised inflation and fears that greater risks are building up,” said Jonathan Fortun, an economist at the IIF.

“The continued volatility in equity markets has hurt the outlook considerably.”

In May, the IIF cut its forecast for the global economy this year to 2.3 per cent, from an earlier estimate of 4.6 per cent, as result of the war in Ukraine, now in its fourth month, as well as uncertainty related to growth in China and rapidly rising interest rates.

The International Monetary Fund lowered its 2022 growth forecast for the global economy to 3.6 per cent in April and, on Tuesday, the World Bank warned of stagflation as it slashed its growth estimate for the global economy for the second time this year to 2.9 per cent.

About $3.4bn of capital outflows were recorded from equities and $1.5bn in bonds in emerging markets in May, the IIF said.

There was a considerable portion of capital flows from Chinese equities for most of May. However, “important flows” were recorded in the past week, which pushed equity flows into positive territory by the end of the month, the IIF said.

China, the world's second-largest economy, attracted $2.7bn worth of capital flows in May, the Washington-based institute said.

China’s zero-Covid policy has forced its industrial output and consumer spending to fall to their worst levels since the coronavirus pandemic began.

Industrial output fell by 2.9 per cent in April from a year ago, while retail sales contracted 11.1 per cent in the period and unemployment climbed to 6.1 per cent.

“On a quarterly basis, the flow picture to EMs has weakened sharply, most likely due to mounting recession risk,” Mr Fortun said.

Capital flows to emerging markets are expected to weaken markedly due to the elevated global recession risks, the IIF said in its global outlook report released last month.

The institute projects that non-resident flows to emerging market countries, excluding China, will fall to $645bn in 2022, from about $1 trillion last year. It also expects a continuation of recent outflows in China.

In the Mena region, the institute said that it expects “a return to strong growth and large current account surpluses”, with “a certain degree of resilience” on the part of oil-exporting countries despite the challenging global growth environment.