May 7, 2020 / 1:58 PM / a month ago

IIF: Fed easing to spur cautious portfolio flows to emerging markets in Q2

LONDON, May 7 (Reuters) - There are signs that portfolio investors are putting money back to work in emerging markets thanks to unprecedented easing from the U.S. Federal Reserve after developing bonds and stocks suffered a "sudden stop" in March, the IIF said on Thursday.

In March, emerging economies suffered sharp outflows as the fallout from the coronavirus pandemic and an oil price shock ripped through global financial markets, with investors pulling a record $83.3 billion from developing stocks and bonds, the Institute of International Finance (IIF) said.

"The violence of the EM 'sudden stop' in March is unparalleled," Robin Brooks, chief economist at the IIF, wrote in his latest note to clients.

"However, the immensity of Fed easing, which first lifted U.S. equity and credit markets, is now also filtering into emerging markets, where our daily tracking of non-resident flows is back in positive territory and almost flat excluding China."

The Fed has pledged to keep interest rates low and continue offering trillions of dollars in credit as long as is needed to shore up the world's largest economy from the economic fallout of the fight against the pandemic, which has killed over 73,000 people in the United States and over 260,000 worldwide.

Since the start of the second quarter, emerging market exchange rates had stabilized and the IIF high frequency tracking of non-resident flows shifted in a positive direction, Brooks wrote.

He also pointed to offshore gross and net issuance on track to hit a record in the three months to end-June if April numbers were extrapolated.

"Putting this issuance picture together with our high-frequency tracking of flows paints a picture of overall stabilization, with flows returning to modest, positive territory in Q2 2020," said Brooks.

"The exodus of capital from emerging markets therefore looks to be firmly in the rearview mirror."

Reporting by Karin Strohecker Editing by Mark Heinrich

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