Following an initial slump in March due to the Iran war, emerging market assets saw a significant rebound in April. According to Institute of International Finance (IIF) data, portfolio flows into emerging markets surged to $58.3 billion in April, largely reversing the $66.2 billion outflow experienced in March. This recovery was primarily driven by fixed income, which attracted $51.9 billion, compared to a $682 million outflow in March. Equity inflows also recovered, reaching $6.4 billion after a $65.5 billion exodus in the previous month.
While the data suggests investors are willing to re-engage with emerging markets, the IIF cautioned that this does not indicate a full return to the pre-crisis optimism that characterized the beginning of the year. The IIF noted that while immediate funding stress has eased, the underlying shock has not been fully absorbed, especially for energy importers, companies, and central banks. The premiums investors demanded for emerging market government debt over U.S. Treasuries, which had spiked during the crisis, have largely reversed.
The recovery showed regional divergences, with much of the rebound occurring outside of China. Ex-China debt inflows reached almost $50 billion in April, a substantial increase from $13.8 billion in March, and ex-China equity flows recovered to $5 billion after a nearly $63 billion outflow. Year-to-date, China's debt flows remained negative at -$16.7 billion, while other emerging markets saw strong positive debt flows of almost $109 billion. Latin America was a top performer, attracting $13 billion in April alone. The Africa and Middle East region also saw $7.3 billion return to debt markets, partially offsetting a $713 million equity outflow.
Prior to the March downturn, emerging economies, led by Saudi Arabia, Mexico, and Turkey, had experienced a record-setting pace of debt issuance in January and February. Sovereign and corporate borrowers in Central and Eastern Europe, the Middle East, and Africa (CEEMEA) had raised an unprecedented $117.5 billion in the first quarter, nearly $3 billion above the same period in the previous year. However, investor caution due to the unpredictability of the conflict, including attacks on Gulf energy infrastructure and the closure of the Strait of Hormuz, led several banks to reduce their overweight positions in emerging markets, with some shifting towards commodities instead.
