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Tribune News network
Doha
Capital flows to Emerging Markets (EM) have picked up in 2019, as expected, the Qatar National Bank’s weekly economic commentary said on Saturday.
The main driver was a dovish pivot by the US Federal Reserve (Fed), which shifted from expectations of continued interest rate hikes at the start of the year to delivering three interest rate cuts by the end of 2019.
The Institute of International Finance (IIF) compile trackers of portfolio capital flows, which cover non-resident purchases of stocks and bonds in a sample of major EM.
In its October outlook, the IIF forecast a modest pickup of non-resident capital flows to EM from $1.1 trillion in 2018 and 2019 to USD 1.2 trillion in 2020. It worries that years of low interest rates and quantitative easing by major central banks have left global investors with portfolios that already have a large share allocated to EM, leaving little room for increased purchases of EM assets.
In 2018, global financial conditions tightened and the US dollar appreciated amidst rising political risks and much weaker economic performance in the Euro area and Asia.
According the IIF Tracker, portfolio capital flows to EM fell from $375 billion in 2017 to $192 billion in 2018.
The year 2019 saw a rebound in portfolio capital flows to EM to an estimated $274 billion (see chart).
The main tailwind for the recovery was a dovish pivot by the Fed. However, the US-China trade war acted as a headwind for much of the year, with investor confidence undermined by repeated delays and disappointments in negotiations.
Negotiations seemed to be heading for a deal in April, but then fell apart over the summer. Later in the year, progress towards a “Phase 1” deal was first announced by President Trump in October, and confirmed by both sides with further details in mid-December.
The proportion of capital flows that are heading to Emerging Asia is estimated at around 67 percent in 2019, down from 70 percent of flows in 2018, but still a greater than the 54 percent share in 2017. In contrast, the proportion of capital flows that are heading to the Middle East and Africa is estimated at around 6 percent in 2019, up from only 3 percent in 2018, but below the share of 12 percent in 2017.
Looking forward to 2020, the report sees three main drivers of a further pickup in portfolio capital flows to EM.
First, global financial conditions remaining supportive of both capital flows to EM. Major central banks will keep interest rates low, which provides EM central banks with policy space to also keep interest rates low and support GDP growth.
Second, at 4.6 percent GDP growth in EM is expected to be considerably stronger in 2020 than growth in advanced economies, which are only expected to grow by 1.5 percent.
Third, although it is far from comprehensive, the “Phase 1” deal between the US and China is a step in the right direction towards de-escalation of the trade war, which will support both global and EM GDP growth.
“Like in May, we still expect non-resident capital flows to EM to pick up more strongly than the IIF for two main reasons. First, our view on global GDP growth is more optimistic than the IIF’s. Second, we believe that higher GDP growth will allow EM economies to continue to supply investors with assets offering attractive risk-adjusted returns.”
Doha
Capital flows to Emerging Markets (EM) have picked up in 2019, as expected, the Qatar National Bank’s weekly economic commentary said on Saturday.
The main driver was a dovish pivot by the US Federal Reserve (Fed), which shifted from expectations of continued interest rate hikes at the start of the year to delivering three interest rate cuts by the end of 2019.
The Institute of International Finance (IIF) compile trackers of portfolio capital flows, which cover non-resident purchases of stocks and bonds in a sample of major EM.
In its October outlook, the IIF forecast a modest pickup of non-resident capital flows to EM from $1.1 trillion in 2018 and 2019 to USD 1.2 trillion in 2020. It worries that years of low interest rates and quantitative easing by major central banks have left global investors with portfolios that already have a large share allocated to EM, leaving little room for increased purchases of EM assets.
In 2018, global financial conditions tightened and the US dollar appreciated amidst rising political risks and much weaker economic performance in the Euro area and Asia.
According the IIF Tracker, portfolio capital flows to EM fell from $375 billion in 2017 to $192 billion in 2018.
The year 2019 saw a rebound in portfolio capital flows to EM to an estimated $274 billion (see chart).
The main tailwind for the recovery was a dovish pivot by the Fed. However, the US-China trade war acted as a headwind for much of the year, with investor confidence undermined by repeated delays and disappointments in negotiations.
Negotiations seemed to be heading for a deal in April, but then fell apart over the summer. Later in the year, progress towards a “Phase 1” deal was first announced by President Trump in October, and confirmed by both sides with further details in mid-December.
The proportion of capital flows that are heading to Emerging Asia is estimated at around 67 percent in 2019, down from 70 percent of flows in 2018, but still a greater than the 54 percent share in 2017. In contrast, the proportion of capital flows that are heading to the Middle East and Africa is estimated at around 6 percent in 2019, up from only 3 percent in 2018, but below the share of 12 percent in 2017.
Looking forward to 2020, the report sees three main drivers of a further pickup in portfolio capital flows to EM.
First, global financial conditions remaining supportive of both capital flows to EM. Major central banks will keep interest rates low, which provides EM central banks with policy space to also keep interest rates low and support GDP growth.
Second, at 4.6 percent GDP growth in EM is expected to be considerably stronger in 2020 than growth in advanced economies, which are only expected to grow by 1.5 percent.
Third, although it is far from comprehensive, the “Phase 1” deal between the US and China is a step in the right direction towards de-escalation of the trade war, which will support both global and EM GDP growth.
“Like in May, we still expect non-resident capital flows to EM to pick up more strongly than the IIF for two main reasons. First, our view on global GDP growth is more optimistic than the IIF’s. Second, we believe that higher GDP growth will allow EM economies to continue to supply investors with assets offering attractive risk-adjusted returns.”
