Non-resident investment flows into emerging markets (EM) equity was up in April to $38bn in April, except Russia which saw $2.8bn of outflows as sanctions fears reappear, the Institute of International Finance (IIF) said in a note on May 1.

EM stocks, other than China and Russia, which are seen as special cases, were attracting portfolio investors’ attention in the first quarter of this year thanks to the softening of credit policy by the US Federal Reserve bank.

EM stocks and bonds saw inflows of $29.6bn and $32.6bn in February and March respectively, according to IIF, before accelerating to the $38bn result in April.

However, IIF said that even these results are subdued as following years of quantitative easing by central banks around the world and near zero interest rates the resulting carry trades mean the market is distorted and investors have a large positioning overhang in EM stocks.

A lot of the money going into EM markets has gone into debt: EM bonds accounted for two-thirds of all the inflows of $24bn in April, after $25.3bn in March. bne IntelliNews’s most recent monthly CEE bond wrap shows a window opened for bond issues from the emerging Europe region, especially in March. More recently analysts warn that debt from Eastern Europe is selling off and the downturn in foreigners’ share of Russian Ministry of Finance ruble-denominated OFZ treasury bills was particularly pronounced.

From the inflows of debt into EMs, emerging Europe accounted for the least, or $4.9bn in April, while Russia saw outflows in the same month.

Equity market inflows to EMs were $14.1bn in April – the strongest this year, with China accounting for $3.6bn of that. Russia’s equity market remains “uninteresting” according to Vyacheslav Smolyaninov, chief strategist and deputy head of research at BSC Global Markets as many of the Russian blue chips are exposed to sanctions, so investors are still concentrating on Russia’s high yielding, low risk debt instead.

According to IIF’s border measure of capital inflows, that includes foreign direct investment (FDI) and bank loans, Russia is bucking the trend and saw a total outflow of $2.9bn. 

Drilling into the result, Russia saw total capital outflows starting in the second half of last year and has seen outflows every month since the start of this year, although the pace of outflow has slowed somewhat in recent months, falling from $4.4bn in January to $2.3bn of outflows in March.

Ukraine has been faring much better with net inflows of $6.8bn in the second half of 2018 and $300mn in the first quarter of this year. However, the tide may be turning there too as both January and February saw mild outflows, though there was an inflow of $1.2bn in March.