Stocks weigh as foreign investors pull US$27 bln out of emerging market portfolios in May

Foreign investors pulled nearly US$27 billion (HK$211.6 billion) net from emerging market portfolios in May, partially reversing a rebound in April as equity selling in Asia overwhelmed debt inflows, data from a banking trade group showed on Wednesday.

Non-resident investors withdrew a net US$26.6 billion from emerging bonds and stocks in May, according to the Institute of International Finance, compared with inflows of US$70.6 billion in April.

The reversal was driven almost entirely by equities - foreign investors pulled US$37.0 billion from EM stocks during the month. Debt markets attracted a net US$10.4 billion.

“The month-to-month swing was large, at US$97.2 bln, and shows that April’s reopening did not become a straight-line normalization in capital flows,” said Jonathan Fortun, senior economist at the IIF.

The report cautioned about the early June market selloff that followed stronger-than-expected US payrolls data. Combined with higher energy prices and a pick-up in bets on a rate hike from the Federal Reserve, the shift has raised the threshold for investing in emerging markets.

“Firmer US labor data, elevated energy prices and renewed inflation risk raise the hurdle rate for EM duration and equity risk, especially where external balances or policy credibility are already being questioned,” said the IIF.

The stocks selling during May was concentrated in South Korea, India and, to a lesser extent, Brazil - all large and liquid markets.

Emerging Asia recorded net portfolio outflows of US$31.6 billion, more than the total outflow for emerging markets as a whole. Flows to Latin America, emerging Europe, and the Middle East and North Africa all remained in positive territory.

Chinese stocks diverged from the wider Asian trend as equities there attracted a net US$8.1 billion, while debt outflows reached US$4.3 billion. Ex-China stocks have suffered outflows of more than US$113 billion between March and May.

But South Korea’s tech-heavy stocks - a weathervane for market sentiment on AI exposure - was the main pressure point for stocks in May with investors pulling US$27.9 billion. India equities shed US$4.9 billion and Brazil US$2.9 billion.

Debt markets proved more resilient, with EM ex-China attracting US$14.7 billion of inflows.

Overall, emerging stocks and bonds have seen US$132.5 billion of net inflows since the start of the year - or nearly half of last year’s annual total, with debt taking the lion’s share.

Investors continued to favor countries offering relatively high real yields and credible policy frameworks, though the IIF said conditions had become less forgiving as higher oil prices, rising US Treasury yields and renewed inflation concerns weighed on risk appetite.

“May’s debt data keeps this month from becoming a simple risk-off story,” Fortun wrote. “Market access has not closed and carry still matters. Local currency debt remains supported where real rates are high and credibility is intact. Hard currency credit still benefits from coupon income and demand for yield.”

Reuters

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