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Emerging countries once again attracted international capital

February 5, 2024 – 00:00

It was a good end to the year for the financial assets of emerging markets, which in December received a net flow of US$29 billion.

Based on the data that is becoming known at the end of last year, it can be inferred that The outflow of international capital from emerging markets slowed but also in the last two months there was a strong inflow of funds from non-residents. However, monitoring the actions of global funds and investors would indicate that global capital outflows from Chinese financial assets persist. All of this occurred after a period of strong departures between last August and October.

According to the latest survey of the Institute of International Finance (IIF) last December it is estimated that emerging market financial assets attracted around US$29 billion. So in the last two months of 2023 the flow of net funds to emerging countries totaled more than u$s 72 billionwhich marginally benefited Argentine assets in the midst of the electoral process and the change of government.

In general terms, the IIF highlights that Chinese stocks and bonds continued to perform poorly, totaling a total outflow of around $3.2 billion in December. While on the other hand, emerging market debt Excluding China, it experienced a capital inflow during December, totaling around US$10.9 billion. In particular, the IIF’s Capital Flows Tracker shows that in December there were inflows into emerging markets in Asia – excluding China – and Latin America totaling around US$18.5 billion and US$9.7 billion, respectively.

What seems to become clear then is that, at a global level, emerging market assets They once again attracted capital from non-residents, registering general inflows of flows throughout the complex of these countries for the second consecutive month last December. “The overall performance is mainly explained by capital inflows to emerging markets – excluding China – as opposed to persistent capital outflows from China,” says Jonathan Fortun, IIF economist. He highlights in particular that, Chinese stocks and bonds recorded a global outflow of around $3.2 billion in December ($3.4 billion outflow into stocks and a marginal inflow of $200 million into bonds). . “On the contrary, we see emerging market debt and equities, excluding China, reaffirming their recovery. “This confirms the bifurcation between China and the rest of the emerging markets, suggesting a change in investor sentiment,” says Fortun.

A more benign investment environment

As for the new flows into emerging market debt (excluding China), for the IIF this is mainly linked to a more benign overall investment environment, supported by a dovish outlook for the Federal Reserve (Fed) stance, the assumption of a “soft landing” in the US. and the positive performance of debt in local currency, which shows its best performance since 2019.

While on the side of the emerging market equities -excluding China- the good performance is also highlighted, taking advantage of the rebound last year in the US markets and the relatively cheap valuations in a handful of emerging markets, among them, undoubtedly Argentina.

Another aspect that the IIF highlights is that the currency returns of emerging markets will remain closely linked to the US economy in 2024 and notes that: “a shift towards a more dovish stance by the Federal Reserve has allowed emerging market central banks to take a more assertive approach to easing their measures monetary.” In this regard, they link this shift mainly to the disinflationary trends observed in the prices of basic goods.

As for the default risksthe entity that represents international banking and funds, considers that while emerging markets have seen a substantial increase in debt levels since the start of the pandemic, the risk of experiencing short-term financing stress appears to be quite high. low at the moment, mainly due to the constant growth of reserves in the large emerging markets. “The holding of local government debt by foreign investors in countries such as Brazil, the Czech Republic, Indonesia and South Africa it is still far behind the levels seen before the pandemic, which represents an opportunity for greater debt inflows in 2024,” says Fortun. However, he warns, flows to China continue to be slowed by high geopolitical risk.

In summary, in December the net flows towards emerging assets totaled more than US$ 29,000 million, of which towards stocks they were more than US$ 11,100 million (the Chinese ones suffered outflows of US$ 3,400 million) and bonds other u $18,000 million.

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