Portfolio flows into Emerging Markets

Once again, I am surprised by the resilience of the markets to COVID-19. Of course there were some jitters last week: the S&P down 11%, Japan is down 12% since the outbreak started hurting stocks. Weirdly, the Shanghai index is only down 2% since Chinese New Year, while Vietnam is down 10% since Tet. [The Shanghai figure is crazy to me - the PMI is 37.5! Factories have been closed for over a month. I would think that the stock market would represent this somehow.] However, the central banks are stepping in, and there is hope that things will come back.

Source: IIF, chart by Vietecon.com

More importantly, we are still seeing pretty solid portfolio flows into emerging markets. On a net basis, inflows were positive $3.5bn in February, according to the IIF. That’s inflows. That’s in a time when everyone is scared of investing and the markets are crashing, yet February inflows weren’t that bad. The worst month was back in August, when equity flows fell $42bn. I can’t really remember why that was - general jitters over the US-Chinese trade war, probably.

A few interesting things about the data:

• The average in this sample is an equity inflow of $3.2bn and a debt inflow of $17.5bn, since December 2018.

• The standard deviation is almost double for equity (16.8) as for debt (8.6). Debt flows are less volatile, and more consistent.

• Debt flows have not been negative over the whole period. Looking back a bit farther, there are some periods when they have been negative, but it seems much less than equity. At least in this period.

• Equity flows can very quickly reverse. For example, in 2019, cumulative equity inflows reached $68.2bn in July, but then fell to $26.2bn after the outflow, and then never recovered their peaks.

Source: Vietnam Ministry of Investment & Planning

Of course, these figure are for all emerging markets. I also wanted to look at foreign direct investment in Vietnam (some of which is in equity markets but also in companies). This data shows a surprisingly similar story, with February figures low but not crazy.

In February, total FDI was $850m, which was not the worst February since 2014 (that would be February 2018), and well within the standard deviation for Februaries. Although looking at the chart to the right, you can see that the trend has generally been positive, and this is a pretty weak reading. It is the greatest decline m-o-m and y-o-y in February.

Ultimately, I think the reason why FDI continues to be relatively solid, despite much of the country being closed is because FDI is sticky. Samsung just cancelled the groundbreaking for its new $220m R&D center in Vietnam. But it is still investing. It just isn’t throwing a party. If lots of companies are like that, and also want to move away from China, it isn’t surprising that February FDI is solid.

We will have to see how March does.