Foreign investors plough $19.2 billion into emerging markets in May, says IIF

By Rodrigo Campos

NEW YORK, June 9 (Reuters) - Foreigners added $19.2 billion to emerging market stocks and bonds in May after an April retrenchment, a banking trade group report found, with Chinese debt and ex-China stocks emerging as the most favored assets as the trade war temporarily cooled.

The May flows, as calculated by the Institute of International Finance (IIF), compare with a $3.7 billion outflow in April and a $6.6 billion inflow in May 2024.

Chinese debt took in $11.1 billion, while the country's equities pulled in $1.4 billion. Outside of China, stocks funneled $7.0 billion - their first positive inflows after seven months of losses - while debt saw a $300 million outflow.

The Trump administration's early April announcement of broad tariffs on imports, and subsequent delays to those while others were hinted or imposed, triggered a bout of volatility and risk aversion that hit emerging markets selectively.

Tariffs and trade remain high on the agenda as leaders of the G7 nations meet next week in Canada.

"The underlying investor tone remains cautious in light of ongoing global uncertainty," said Jonathan Fortun, senior economist at the IIF, in a statement accompanying the data.

"The return of positive flows in May signals a modest shift in sentiment, but one that remains highly contingent on the global monetary backdrop. Investors are not abandoning EM, but they are rotating selectively within it."

Asia took in a net $11.4 billion last month, much of which was absorbed by Chinese debt. Emerging Europe saw a net inflow of $5.1 billion, of which $3.9 billion came into debt portfolios.

Africa and the Middle East took in $1.6 billion, and Latin America came in last at $1.1 billion of portfolio inflows last month.

"Within the equity space, investors appear to be recalibrating exposure toward markets with credible domestic policy anchors and limited sensitivity to global supply chain disruption," Fortun said.

Demand for local currency bonds remains high among non-residents according to the IIF report, especially in Asia, with market support in the form of real yields and stable monetary anchors.

Total emerging markets sovereign issuance remained low at $10.3 billion of new deals in May, according to the data.

"Much of the (debt) issuance came in the form of opportunistic deals from higher rated sovereigns. Market access continues to be limited for lower rated names, despite an improvement in global financial conditions," Fortun said.

"The muted supply picture has reinforced technical support for existing debt and may explain the persistent bid for local paper."