March’s record selloff in emerging-market stocks and bonds has gone into reverse. But overseas investors are flocking only to the least risky assets in the least troubled regions, suggesting their worries haven’t been put completely to rest.
Emerging-market countries including India, China, Brazil and Russia saw nonresident investors buy a total $4.1 billion of their stocks and bonds in May, according to data from the Institute of International Finance. But those investors have also been careful to differentiate between regions where the coronavirus has spread more quickly and those that take different attitudes to the pandemic.
“Some of them are throwing in the towel and lifting lockdown measures, presumably saying the economic costs are too much,” said Edward Glossop, emerging-markets economist at Capital Economics.
In May, inflows into equities have centered on China, which was the first to be hit by the virus and to reopen. Overseas investors put $4.8 billion into Chinese stocks last month, while pulling $4.1 billion out of other emerging-market equities, according to the data.
“Up until six or eight months ago it didn’t matter if you put your money in this emerging market or that emerging market. But now because of the cascading effects of Covid-19 you have regional differences of how this pandemic is developing and how policy makers are responding,” said Jonathan Fortun, an economist at the IIF.
Overseas investors pulled more than $1.1 billion out of Brazilian equities last month and almost $880 million out of Turkish equities, for example, while pouring $1.6 billion into Indian stocks.
In Brazil, the Covid-19 death toll has ticked up as President Jair Bolsonaro played down the severity of the pandemic. Meanwhile, India introduced a stringent lockdown relatively promptly.
Warren Hyland, an emerging-market portfolio manager at Muzinich & Co., expects Asia to be the first part of the developing world to return to precrisis growth levels, followed by Eastern Europe and then Latin America.
“That’s not because they are not dynamic economies in Latin America versus Eastern Europe, it’s just the virus is at an earlier stage there and is going to take a longer time to work its way through the system,” he said.
There were also signs that emerging-market inflows are already slowing down. Investment into emerging-market bonds, which are seen as less risky than stocks, totaled $3.5 billion in May, down from $16.1 billion in April, according to IIF data.
In the longer term, analysts say investors could return to their precrisis playbook, pouring money into emerging markets in a hunt for yield.
Fresh interest-rate cuts and new asset-purchase programs from the Federal Reserve and the European Central Bank in recent weeks could revive the so-called carry trade, where investors borrow in low-yielding currencies such as euros to roll the funds into a higher-yielding asset, such as Indonesian or South African bonds.
Sentiment around emerging markets that are reliant on commodity exports has also improved as the prices of natural resources have ticked up. Brent crude, for example, traded above $40 a barrel on Thursday, up from record lows around $20 a barrel in early April.
For some investors, like Jan Dehn, head of research at Ashmore Group, an emerging-market investment-management firm, the selloff in March presented an opportunity as jittery investors rushed out of emerging markets and flocked to haven assets such as the U.S. dollar.
“Markets dumb down to a very simplistic, binary world where everything boils down to risky to safe assets,” Mr. Dehn said. “Since March, I’ve been telling people: You’ve got to buy this.”
The spread on high-yield emerging-market government bonds tracked by A JPMorgan Chase & Co. (JPM) benchmark—the extra yield that investors demand to hold over U.S. Treasurys—jumped to almost 12 percentage points in March, topping levels during the 2008 global financial crisis. It has fallen since.
Meanwhile, the MSCI emerging-markets (.MXEF) stock benchmark has gained 7.6% over the past month, compared with a 6.6% increase for the S&P 500 (.SPX).
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