By Rodrigo Campos

Foreign Investment in Emerging Markets

NEW YORK (Reuters) – Foreign investors added $273.5 billion to their emerging market equity and debt portfolios last year, nearly $100 billion more than in 2023, according to a bank trade group’s preliminary data published on Friday.

The $273.5 billion of inflows for 2024 topped the $177.4 billion in 2023, though it was below the $375 billion average between 2019-2021, according to the report from the Institute of International Finance.

Investment Breakdown

Almost all the inflow was money put into fixed income last year, with $219 billion added to debt outside China and $54.2 billion to Chinese debt. The picture was more split in stocks, where Chinese equities attracted $11.3 billion, while those elsewhere in developing economies lost $11 billion, the data show.

Economic Factors

U.S. growth and the strength of the dollar were headwinds for investing in emerging markets throughout the year, and the Federal Reserve has downgraded its expectations for rate cuts in 2025, which supports the dollar further.

Signs of a looser monetary policy in the U.S. would benefit EM assets overall.

> “Throughout 2024, the strong dollar and elevated U.S. yields created significant headwinds for EM equities and certain debt markets, a trend that may reverse if the Fed begins signaling rate cuts in the coming months,” said IIF economist Jonathan Fortun.

“While Fed dovishness would provide a much-needed tailwind, sustained recovery in EM equities will likely require further clarity on global growth prospects and targeted policy measures in key markets like China,” he added.

Potential Risks

JPMorgan warned of a potential halt in flows to emerging markets as a strong U.S. economy deterred investors from developing nations perceived as riskier. However, unique factors will continue to influence flows, as indicated by equity inflows in December to India, Brazil, Saudi Arabia, and Taiwan.

The IIF data breakdown by month showed that non-residents added a net $14.4 billion to emerging market portfolios in December, despite stocks posting net overall outflows.

Regional Inflows

Regionally, Latin America led inflows with $6.6 billion, followed by Emerging Asia with $5.3 billion. Africa and the Middle East pulled in $1.7 billion, while Emerging Europe saw inflows of $1.1 billion.