China leads in fourth week of emerging market ETF outflows; India gets inflows

markets

Investors withdrew from exchange-traded funds (ETFs) focused on emerging market stocks and bonds during the past week, marking the fourth consecutive week of outflows.

Total outflows from US-listed ETFs that target emerging markets were $4.73 million in the week ended May 26, a decrease from losses of $511.3 million in the previous week, according to Bloomberg data. However, cumulative inflows for the year so far stand at $8.45 billion.

India received net inflows of $74.5 million, indicating positive investor sentiment. Taiwan, South Korea, Indonesia and Malaysia also received inflows ranging from $5 million to $42 million.

China registered the highest outflow of $223 million, suggesting investor caution and reduced exposure to the country’s markets. Analysts said investors who anticipated China's reopening to drive equity gains in 2023 were proven wrong as emerging markets face uncertainty.

"Factors such as inconsistent economic data, geopolitical tensions, a resurgence of COVID-19 cases, and regulatory risks have dampened enthusiasm. Weakness in the manufacturing and services sectors, rising youth unemployment, and disappointing retail sales and demand – all contribute to the cautious outlook," said Amit Pabari, an analyst at CR Forex Advisors.

The India alternative

The divergence in the monetary policies of the US and China has negatively impacted investor sentiment. With the People's Bank of China leaning towards easing and the US Federal Reserve towards tightening, the high equity risk premium in China compared to India, along with a weaker yuan affecting foreign investors' profits, has resulted in outflows from China.

Conversely, India attracted significant investments from foreign institutional investors this month. Analysts highlighted a more cautious outlook on China and increased interest in alternative markets such as India.

India's growing significance as an alternative to China has incentivised investors to shift their focus towards the opportunities that India presents. India's stable geopolitics, robust domestic fundamentals, well-managed currency, and reduced risk premium make it an attractive destination for foreign investment.

This trend signifies the rising confidence in India as a lucrative market for international investors, analysts added.

Deepak Jasani, head of retail research at HDFC Securities, said India's macro numbers are encouraging, including trade deficit, current account deficit, inflation, and vehicle sales. He highlighted the favourable policy environment, prudent fiscal management, improved global standing, and relatively strong performance by large and midcap companies in the fourth quarter, which enhanced India's appeal to investors.

Jasani said China received disproportionately large sums from ETF funds focused on emerging markets in the past. However, the tide could turn if China demonstrates a sustained resurgence in its economy.