A report released by a banking industry organization shows that investors poured nearly $45 billion into emerging market equity and bond portfolios in August, marking the highest level in nearly a year. However, emerging market equities outside China experienced significant capital outflows, indicating a shift in investor sentiment.

Data from the Institute of International Finance (IIF) shows that emerging market portfolio net inflows reached $44.8 billion last month, compared to $38.1 billion in July (revised down significantly from an initial $55.5 billion) and $28.2 billion in August 2024.

Breaking down by category, Chinese bonds and equities combined attracted net inflows exceeding $39 billion in August, while emerging market bonds outside China drew $13.2 billion in capital inflows. Meanwhile, emerging market equities outside China saw $7.4 billion in outflows after three consecutive months of net inflows.

Jonathan Fortun, senior economist at the International Finance Association, stated in a release accompanying the data that this shift "marks the weakest month for emerging market equity inflows since spring, reflecting a notable reversal in investor sentiment toward emerging markets outside China."

However, external favorable factors may provide support for emerging market assets: U.S. inflation data came in below expectations, further solidifying market expectations that the Federal Reserve will cut interest rates following next week's meeting. Rate cuts in developed economies help channel funds toward higher-yielding emerging markets.

From a regional distribution perspective, the report shows: Asian emerging markets attracted $18.1 billion in inflows, Latin American emerging markets drew $8.9 billion (partly benefiting from bond flows to Mexico and Brazil). IIF data also shows that European emerging markets received $8.7 billion in inflows, while Middle Eastern and North African emerging markets saw $5.8 billion in inflows.

Fortun noted: "All regions saw higher inflow volumes than the previous month, but the underlying pattern still reflects China's important position in portfolio allocation." August was also the largest month for Chinese equity inflows since February this year.

He also stated: "Investor positioning strategies appear increasingly sensitive to headline risks and policy noise, particularly in economies vulnerable to external shocks or those in electoral cycles."