Foreigners Pour $31 Billion Into EM Portfolios in August, With Fed in Sight -IIF

EM Portfolio Flows Jump 46% in August

Emerging markets (EMs) saw a significant inflow of $31 billion in August, a 46% increase from the previous month. The surge in foreign investment was driven by expectations of the US Federal Reserve's (Fed) imminent pivot and the weakening of the US dollar.

Fed Pivot Hopes Fuel Optimism

Market sentiment toward EMs remains positive as investors anticipate a dovish shift from the Fed. The Fed's aggressive rate hikes have weighed on EM currencies and bonds. Expectations that the Fed will soon slow its pace of rate increases have boosted risk appetite and pushed investors toward higher-yielding EM assets.

Dollar Weakness Supports EM Currencies

The weakening of the US dollar has further supported EM currencies. The dollar index, which measures the greenback's value against a basket of major currencies, fell 2.2% in August. A weaker dollar makes EM currencies more attractive for foreign investors.

EM Equities and Bonds See Gains

Both EM equities and bonds benefited from the inflows. EM equity markets rose 3.8% in August, outperforming developed markets. EM bonds also gained, with the JPMorgan EM Bond Index rising 2.5%. The inflows into EM portfolios reflect a return of confidence in these markets, which have faced headwinds in 2022.

Flows Likely to Continue if Fed Pivot Materializes

Analysts believe that the inflows into EM portfolios will continue if the Fed signals a pivot and the US dollar remains weak. However, they also caution that geopolitical risks and global economic growth concerns could impact the flows.