Emerging market investors shrug off Iran war shock, IIF data shows

By Marc Jones

LONDON, May 11 (Reuters) – Global investors swung sharply back into emerging market assets in April, Institute of International Finance data showed on Monday, as markets recovered from Iran war-driven selloffs.

Emerging market portfolio flows – the balance of bond and stock market buying and selling – rebounded to $58.3 billion in April, reversing most of the $66.2 billion outflow in March when the escalating Middle East conflict rattled markets.

Unlike March, when equities bore the brunt of the selloff, April’s recovery was led by fixed income. Emerging market debt drew $51.9 billion after a $682 billion outflow in March, while equity inflows recovered to $6.4 billion following a $65.5 billion exodus in March.

The IIF said the data showed investors were willing to return quickly to emerging markets, but warned this did not amount to a full return to pre-crisis optimism that spurred record inflows at the start of the year.

“Flow data show that immediate funding stress has eased. They do not show that the underlying shock has been absorbed,” the IIF said, noting heightened pressure on energy importers, companies and central banks.

High-flying markets such as South Korea and Taiwan helped MSCI’s 24-country emerging market stocks index post its second-best month in almost two decades in March, in a rally that has shown little sign of easing.

A spike in the premiums – or spreads – investors demand to hold emerging market government debt over U.S. Treasuries has also largely reversed.

“The key question is whether April marks the start of durable normalization or only the first relief phase after an extreme March adjustment,” the IIF said.

The report also highlighted regional divergences, with much of the recovery coming outside China, particularly in debt markets. Ex-China debt inflows reached almost $50 billion, up from $13.8 billion in March, while ex-China equity flows recovered to $5 billion after an almost $63 billion outflow.

Year to date, China debt flows remain negative at -$16.7 billion, while debt flows to emerging markets outside China are strongly positive at almost $109 billion. Latin America, one of the top-performing regions, drew $13 billion in April alone.

The Africa and Middle East region saw $7.3 billion return to debt markets after a $6.5 billion outflow in March, partly offset by a further $713 million equity outflow.

(Reporting by Marc Jones. Editing by Karin Strohecker and Mark Potter)