Emerging markets resilient in new IIF flow tracker

Emerging markets resilient in new IIF flow tracker


Portfolio flows to emerging debt markets have held up better over the past year than much of the financial community is assuming, according to a new indicator from the Institute of International Finance. The news comes as EPFR data for the week to 12 March shows inflows to local currency bond funds at their highest level since May 2013.

Analysts and media have watched fund data closely in recent months, as expectations of higher US rates have led to bets that hot money flows to emerging market debt would reverse, after building up thanks to quantitative easing.

Robin Koepke, an economist working on the IIF’s new monthly tracker of flows, said the reality may not be as grim as the headlines suggest: “A big section of longer-term institutional investors have not been as sensitive as the investors that much of the media and analyst community have focused on.”

EPFR has become an international financial industry benchmark for data on fund flows. But according to Koepke, EPFR’s method of gathering data from funds only offers a subset of the real picture. EPFR data is “timely, but not comprehensive”, according to the IIF.

In Koepke’s view EPFR’s data overemphasizes retail flows and misses much of the underlying institutional flows, especially on the debt side. “EPFR is useful for many things, but in terms of gauging overall flows, it’s limited,” he said.

The IIF’s new monthly tracker takes figures on countries which publish regular data on flows, and from that builds an estimate of the overall picture, using historical data to infer those countries’ proportion of total flows, supplemented by data on bond issuance, asset price movements, and from EPFR.

According to the IIF, portfolio inflows to emerging markets reached $214 billion in 2013. The Institute’s data also shows more resilience in portfolio flows during the first months of 2014 than data from conventional sources, such as EPFR.

Based on the accuracy of past estimates — which they tested against subsequently released data from countries which publish fund flows less regularly — Koepke said the IIF’s debt market tracker has an average margin of error of around $5.5 billion.

However, according to Koepke this means observers “can be confident that there were positive inflows” to emerging market debt in February. The IIF’s estimates suggest $15 billion of portfolio debt inflows in January, and $18 billion in February.

Those figures are much less gloomy than recent EPFR data. Despite inflows to fixed income funds of $560 million in the week to 12 March, the latest EPFR data shows $11 billion in outflows from emerging market bond funds in 2014 year to date. LF