The COVID-19 shock has resulted in a pronounced sudden stop in capital flows to emerging markets (EM).
Institute of International Finance's daily tracking of non-resident portfolio flows points to the largest EM outflow ever in Q1 2020, including at the worst points of the global financial crisis. The resource, Global Macro Views, feeds these outflows into IIF's EM positioning database introduced last year. That database folds in data on the value of foreign real money holdings of stocks and bonds in EM, which allow IIF to estimate valuation changes on underlying positions.
The resource highlights how on top of record outflows, substantial valuation losses are also likely in Q1 2020, so that the overall reduction in foreign investor exposure to EM is very substantial. That decline, coupled with the many Fed easing measures announced in recent weeks, is a stabilizing force for EM. At the same time, it is possible markets are re-focusing on potential fall-out of the COVID-19 shock for emerging and frontier markets, which – even after big outflows in Q1 – carries the risk of a second wave of outflows.