US 'exceptionalism' and Chinese 'stability' have squeezed out EM flows

Global Flow Update—Jan

• Despite accelerating global growth, emerging markets ex. China saw continued equity outflows in 2021, offset somewhat by fixed income inflows;

• Instead, foreign investors sought out exposure to US equities and Chinese fixed income securities;

• Whether such exceptionalism continues will matter for the recovery of EM assets in 2022.

A year ago we highlighted the surge in EM capital flows following the US election and the announcement of COVID vaccine (link). As we noted then:

From a near to medium-term perspective then, the question remains how much further could EM portfolio flows run? The answer depends to some extent on EM and global economic growth to which portfolio flows have historically been correlated. Given continued accommodative fiscal and monetary policy and the prospects for vaccine rollout (which itself will act as a powerful form of global stimulus), growth expectations for 2021-22 look reasonably robust. If realized, this should provide a powerful boost for EM portfolio flows over the next several quarters.

And, indeed, despite issues with vaccine rollout and the emergence of new variants, global growth did rebound strongly. But 2021 turned out to be another challenging year from the perspective of EM capital flows. Especially equity flows.