Record flow of funds to emerging markets

As the signs of recovery observed in the economies on a global scale increased and the threat of severe recession decreased, this situation caused the interest in emerging market shares and bonds to aggravate, while Turkey diverged negatively from this scenario.

The world economy showing signs of recovery started to increase the demand for emerging markets.

While China’s rebounding economy and slowing global inflation helped to reverse the decline experienced last year, investors began to pay heavy attention to the stocks and bonds of emerging markets at a near-record rate.

Emerging stock and debt markets attracted a net $1.1 billion in new funds this week, according to high-frequency information from the Institute of International Finance (IIF) tracking 21 countries. The cross-border money flow rate has surpassed the peaks of the last 20 years to take second place after the inflows following the lifting of the coronavirus lockdowns in late 2020 and early 2021.

Falling global inflation led many market participants to pricing in developed countries’ central banks, including the US Federal Reserve, that they would soon stop raising interest rates, relieving a major problem for developing countries.

JPMorgan Analyst Jahangir Aziz said there was “a lot of fuel in stock” for further recovery in inflows as the precious economic uncertainties that had dragged down emerging markets had “disappeared”.

The threat of recession has also diminished. The information released on Thursday showed that the US economy grew above expectations in the last quarter of 2022, growing at an annualized rate of 2.9 percent, while unemployment claims remained low.

China is a clear center ahead in the inflows

On the other hand, China’s decision to shelve its zero-Kovid policy also had a great impact. According to IIF data, $800 million of the $1.1 billion daily flow for all emerging markets is generated by the country’s inflows, while other developing countries benefit from the knock-on effect of Beijing’s attack.

Emerging market assets were further helped by investors’ expectations that emerging economies will outpace advanced economies this year.

JPMorgan expects emerging market GDP to grow by 1.4 percentage points in 2023, compared to advanced economies, from zero in the second half of 2022.

The rally points to the bull market

Shares in the benchmark MSCI Emerging Markets Index are up nearly 25 percent since their lowest level in late October. An increase of more than 20 percent from the recent low is considered a bull market.

Despite a strong start to 2023, a number of investors and analysts have warned that continued inflows are unlikely.

Paul Greer, EM bond portfolio manager at Fidelity International, said the rally in emerging market assets may have left many behind.

“The first and second quarters of 2023 will see a revival in China, there is no doubt about it. But more than one of this is now priced by the markets. We may have left the lion’s share of the rally behind in this cycle,” he said.

Rally is about reducing risks

Greer said the rally could partly be explained by the return of investors to emerging assets after significantly reducing their risk for much of the last decade, particularly in the first three quarters of last year.

Many emerging economies had previously tried to achieve rapid growth rates in the wake of the 2008-09 financial crisis and were hit particularly hard by global inflation and the rise in the US dollar for much of 2022.

Greer added that despite the recent recovery, investors are unlikely to be optimistic about future growth in emerging markets. Rising debt levels, greater financial tensions in many of the developing world, and the growing negative impact of demographics will dampen potential growth, he said.

“It’s hard to be as rosy as before Covid when it comes to emerging markets,” he said.

Turkey negatively diverged

On the other hand, a different scenario was experienced in Turkey compared to the CBRT data. According to the securities statistics published by the Central Bank of the Republic of Turkey, non-residents sold 6.2 billion dollars worth of Turkish assets in 2022.

While net share sales of foreign investors for 2022 were 3.95 billion dollars, net bond sales were 2.15 billion dollars. While a similar scenario was experienced in 2023, it was observed that foreigners sold 1.5 billion dollars of net shares in the last 7 weeks.