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Capital flows to emerging markets surge to 21-month high

Global emerging markets (EMs) cinched foreign portfolio inflows of $36.8 billion in March, the strongest month since June 2014, with Asia leading the way, according to the Institute of International Finance (IIF).

Both EM bonds and equities saw robust inflows on a combination of accommodative central banks and bargain hunting, the IIF said in a new report on Tuesday.

"In the absence of much improvement in the fundamental economic outlook for EMs, it appears that March's surge was mainly due to a global risk-on shift in investor behavior and lower mature market interest rates, supported by surprisingly dovish signals from the FOMC [Federal Open Market Committee] on March 16."

March's intake was also well above February's $5.2 billion reading and beat the 2010-2014 average of $22 billion.

The inpouring ended on March 24, having lasted nearly a full month, making March the second-longest episode of surging inflows since the IIF started publishing flows data.

A look at the IIF's regional breakdown showed Asian EMs attracted $20.6 billion, over half of the total EM inflows.

"Investors flocked back into badly beaten Korean equities, while bond issuance across the region was much stronger than usual," the report noted.

South Korean stocks and bonds logged their third straight month of outflows in February, extending a selloff triggered by December's U.S. rate hike, Reuters reported earlier this month.

Latin America also experienced sizeable inflows of $13.4 billion, aided by increased foreign interest in Brazil, the IIF noted.

Foreigners injected over $2 billion into Brazilian equities on the back of attractive valuations and hopes for political change, the IIF explained. Brazilian President Dilma's Rousseff looming impeachment has seen the benchmark Bovespa pop 23 percent over the past 30 days.

But March's strong EM performance may just be a one-off, the IIF warned.

"Going forward, the going could get a bit rougher, as markets have taken a breather in recent days, in part because Fed officials have struck a less dovish tone in recent speeches, and as valuations are no longer so attractive."

The International Monetary Fund (IMF) issued a bleak outlook ahead for EMs in a new research paper this month, warning that some EM economies may face significant financing gaps in times of crisis.

EMs lack access to bilateral swap agreements that aided advanced economies during the global financial crisis, making them vulnerable to external shocks, the IMF observed.

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