Capital flows to emerging markets have turned positive for the first time since the second quarter of 2014, according to analysis by NN Investment Partners.

The Dutch investment house calculates that emerging markets attracted a net $28.6bn of capital in the first quarter of 2017, a sharp improvement on the $238bn that it says was shipped out of the developing world in the last three months of 2016.

The figures build on recent data from the Institute of International Finance, an industry association, which suggested EM capital flows turned positive in February for the first time since January 2015.

“We have seen better flows in most countries as investors clearly appreciated better global trade growth and rising commodity prices,” said Maarten-Jan Bakkum, senior emerging markets strategist at NN IP, although he added that a key factor was a “sharp improvement” in Chinese flows as a result of capital controls and tighter regulation.

The IIF’s figures, based on 10 countries, suggest that emerging markets saw outflows of $55.1bn in January, in line with the trend from the second half of 2016, but inflows of $35.8bn in February, as the first chart shows.

However, given that the February tally was largely due to $27.5bn of inflows into China, breaking a 34-month trend of outflows, the IIF cautioned that the turnround could simply be a distortion caused by the Chinese new year, which was relatively early this year and which led to a sharp reversal in China’s trade balance, from an average monthly surplus of $71bn over the previous quarter to a deficit of $22bn in February.

Due to its quarterly nature, NN IP’s data strip out the impact of the moveable feast that is Chinese new year. In contrast to the IIF’s numbers, they suggest that emerging markets enjoyed net capital inflows of $17bn in January and $11.8bn in February, with a small outflow of $160m in March, as the second chart shows.

The data, based on 20 countries, are calculated by taking balance of payments figures and stripping out the current account balance, as well adjusting for changes in foreign exchange reserves.

They suggest that although China saw modest net capital inflows in February and March, the first positive months since April 2014, it witnessed an overall outflow of $8.5bn in the first three months of 2017.

Instead, the EM rebound was driven by the likes of Argentina, with net inflows of $17.5bn, India ($16bn), Brazil ($14.4bn), Mexico and Indonesia (both $9bn), Egypt ($8bn) and Turkey ($6.7bn).

“The improvements have been across the board,” said Mr Bakkum. “The biggest change has been in countries that are perceived to be the most sensitive to risk sentiment. High beta markets, such as Brazil, Turkey, Indonesia and India had a better number.”

However, South Korea and Taiwan continued to post outflows, as they have done for every month since at least 2013, something Mr Bakkum attributed to their status as near-developed countries with a host of companies that invest overseas.

Capital also flowed out of Russia during the first quarter as oil revenues continue to be recycled elsewhere.

Separately, NN IP said its proprietary EM Growth Momentum Indicator — an aggregation of eight growth measures in 20 EM countries — which rose sharply during 2016, declined in February and March.

Mr Bakkum said the reasons for this were unclear, but were potentially related to a bout of deleveraging in many EM countries. “Steadily slowing credit growth is keeping a lid on consumption and fixed-investment growth,” he said.

However, Mr Bakkum was hopeful that with financial conditions easing, domestic demand growth and overall economic momentum would start to improve again, particularly with monetary tightening in the developed world proceeding at a pace “that is gradual enough for emerging markets to be able to adapt to”.

The one potential fly in the ointment is China, he fears, given that “credit growth is slowing quite fast” and falling iron ore and steel prices “suggest that real estate is beginning to slow down”.

“The make or break for this is really China. Growth [there] is really close to peaking,” Mr Bakkum said.

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