By Rodrigo Campos
NEW YORK (Reuters) -Foreigners added nearly $16 billion to their emerging market portfolios in February, with investors loading up on Chinese stocks as well as debt across developing economies, a report from a finance trade group said on Thursday.
Chinese stocks sucked in $11.2 billion, but selling elsewhere meant emerging market equity portfolios saw a net outflow of $2.1 billion last month. The picture was the reverse in fixed income, where Chinese bonds posted a $15.1 billion outflow even as emerging market debt elsewhere raked in $33.2 billion.
The overall $15.9 billion net inflow to emerging market portfolios last month compares with $21.2 billion in January and $27.8 billion in February 2024, according to data from the Institute of International Finance (IIF).
The February inflow to Chinese equities was the largest for any month since September and the second largest in over two years.
“The ‘animal spirits’ are being awakened with a recognition of the advances that Chinese companies made in diverse areas such as AI and electric vehicles,” said Guilherme Valle, founding partner and portfolio manager at ABS Global Investments in an email exchange.
“The combination of innovative business models and low valuations will continue to provide a favorable backdrop for Chinese equities,” he said.
The decoupling of Chinese stocks from the rest of emerging markets was evident in the February data, according to Jonathan Fortun, senior economist at the IIF.
“However, caution around regulatory risks and geopolitical uncertainty remained evident,” he added.
A year-long rally in Chinese stocks has come to the fore in recent weeks as investors, eager to ditch Wall Street, bet on emerging market stocks from Beijing and beyond.
The MSCI Chinese equity benchmark has rallied 40% over the past 12 months. However, year-to-date it is Colombia and Poland who are leading the gains in dollar-terms, boosted by their strengthening currencies.
Despite having recently touched its highest in three years, the MSCI China index remains more than 40% below its 2021 peak.
Analysts said this gives Chinese equities room to continue rallying, but also speaks to the longer term trend of reorganizing some supply chains around China, making other connected emerging markets more attractive.
“Labor costs in China have now basically risen to the point where it is far cheaper to do business in places like Thailand or Indonesia, Vietnam or India,” said Arjun Divecha, head of GMO Emerging Markets Equity.
Divecha says he is bullish on Chinese equities though his firm recently launched an active ETF for investing in emerging markets beyond China.
“These supply chains are moving, there’s no question about it. So the growth opportunity for all kinds of players is actually massive.”
In its regional breakdown, the IIF report showed Latin America was the region with by far the largest inflows last month, funneling in $10.7 billion between equities and debt. Emerging Europe pulled in $4 billion and Asia $2.6 billion, while Africa and the Middle East saw a net outflow of $1.4 billion.
(Reporting by Rodrigo Campos; graphics by Marc Jones; editing by Chizu Nomiyama and Christina Fincher)
