Emerging markets attract $17bn of inflows in first three weeks of

Investors have piled billions of dollars into emerging market assets at the start of 2021 after a banner end to last year, showing how the flood of central bank stimulus continues to drive a frantic hunt for returns.

A group of 30 major developing countries has attracted $17bn in inflows in the first three weeks of January alone, according to a Financial Times analysis of daily data from the Institute of International Finance.

The strong start to 2021, with inflows largely aimed at equities, comes after a dramatic shift last year. After a record exodus of almost $90bn in March at the onset of the pandemic, investors returned to EM stock and bond markets in a rising flood, with almost $180bn in the fourth quarter bringing total inflows in the final nine months of 2020 to more than $360bn, according to a broader IIF dataset that tracks 63 emerging economies.

“The hunt for yield is most certainly on and will last a long time,” said Robin Brooks, the IIF’s chief economist. 

EM stocks have risen about 9 per cent in 2021 in dollar terms, outpacing developed markets, which have gained 2.7 per cent, according to the MSCI EM and World indices, respectively. Bond prices have softened, however, reflecting a soggy start to 2021 for global fixed-income markets.

Bank of America’s survey this month of investors with half a trillion dollars in assets under management illustrates how many fund houses are upbeat on the asset class this year.

The bank found a record 62 per cent of fund managers were overweight EM equities in January — allocating a bigger share of their capital than the levels in their benchmark indices. Two-thirds of fund managers surveyed said EMs would be the top-performing asset class of 2021.

Rising optimism over EMs was matched by increasing pessimism over US assets, the survey found.

However, analysts warned that, while economic and business conditions were supportive for many EMs, recent inflows of foreign capital had been driven largely by huge stimulus programmes by the US Federal Reserve and other central banks during the pandemic, leaving vast pools of investment capital in search of greater returns than those typically available in developed markets.

Investors have been buoyed by the better than expected performance of many developing economies during the pandemic and by the early arrival of vaccines. Despite severe mortality rates in some countries, especially in Latin America, many others have suffered less acutely than expected, putting less strain than feared on health services and stretched public finances.

Trillions of dollars in liquidity injections from the Fed and other central banks, combined with swap lines from the Fed to several large EM central banks and swift action in the form of emergency lending from the IMF and the World Bank, have so far averted any systemic debt problems.

Many investors hope EMs reliant on exports of commodities and other goods will benefit from rising demand from China,…