NEW YORK, June 10 (Reuters) - Foreign investors pulled nearly $27 billion net from emerging market portfolios in May, partially reversing a rebound in April as equity selling in Asia overwhelmed debt inflows, data from a banking trade group showed on Wednesday.
Non-resident investors withdrew a net $26.6 billion from emerging bonds and stocks in May, according to the Institute of International Finance, compared with inflows of $70.6 billion in April.
The reversal was driven almost entirely by equities - foreign investors pulled $37.0 billion from EM stocks during the month. Debt markets attracted a net $10.4 billion.
“The month-to-month swing was large, at $97.2 bln, and shows that April's reopening did not become a straight-line normalization in capital flows,” said Jonathan Fortun, senior economist at the IIF.
The report cautioned about the early June market selloff that followed stronger-than-expected U.S. payrolls data. Combined with higher energy prices and a pick-up in bets on a rate hike from the Federal Reserve, the shift has raised the threshold for investing in emerging markets.
"Firmer U.S. labor data, elevated energy prices and renewed inflation risk raise the hurdle rate for EM duration and equity risk, especially where external balances or policy credibility are already being questioned," said the IIF.
The stocks selling during May was concentrated in South Korea, India and, to a lesser extent, Brazil - all large and liquid markets.
Emerging Asia recorded net portfolio outflows of $31.6 billion, more than the total outflow for emerging markets as a whole. Flows to Latin America, emerging Europe, and the Middle East and North Africa all remained in positive territory.
Chinese stocks diverged from the wider Asian trend as equities there attracted a net $8.1 billion, while debt outflows reached $4.3 billion. Ex-China stocks have suffered outflows of more than $113 billion between March and May.
But South Korea's tech-heavy stocks - a weathervane for market sentiment on AI exposure - was the main pressure point for stocks in May with investors pulling $27.9 billion. India equities shed $4.9 billion and Brazil $2.9 billion.
Debt markets proved more resilient, with EM ex-China attracting $14.7 billion of inflows.
Overall, emerging stocks and bonds have seen $132.5 billion of net inflows since the start of the year - or nearly half of last year's annual total, with debt taking the lion's share.
Investors continued to favor countries offering relatively high real yields and credible policy frameworks, though the IIF said conditions had become less forgiving as higher oil prices, rising U.S. Treasury yields and renewed inflation concerns weighed on risk appetite.
"May’s debt data keeps this month from becoming a simple risk-off story," Fortun wrote. "Market access has not closed and carry still matters. Local currency debt remains supported where real rates are high and credibility is intact. Hard currency credit still benefits from coupon income and demand for yield."
Reporting by Rodrigo Campos in New York; editing by Karin Strohecker
