Emerging markets: Sustainable turnaround in capital inflows?

For several months now emerging markets have been enjoying increased popularity again among portfolio investors. Estimates released by the Institute of International Finance (IIF) suggest that, over the last three months, on balance an average of more than USD 25bn has been plowed into emerging market stock and bond markets every month - compared with a long-term average of around USD 18bn. This comes after a period of what were, at times, hefty capital outflows starting in the middle of last year. In the period between July 2015 and February 2016, non-resident portfolio investors pulled a cumulative total of more than USD 76bn out of the emerging markets.

So why have international investors been stepping up their investments in the emerging markets again of late? Is this development driven by fundamental improvements in the emerging markets themselves, or does it reflect an at least temporary rebound in risk appetite on the international financial markets? Looking at the latest economic indicators such as purchasing manager indices and “hard” data on foreign trade and industrial production in the three major emerging market regions Asia, Latin America and Eastern Europe, the broad picture is of a sideways movement – i.e. neither a significant acceleration nor a significant slowdown in growth.

Russia is one of the few exceptions. Eastern Europe's largest economy has been in the throes of recession since last year, with gross domestic product contracting by 3.7% in real terms in 2015. At the moment, the economy appears to be stabilizing at least, with GDP in the second quarter down by only around half a percentage point year-on-year. Industrial production would appear to have bottomed out and the past few months have brought a return to a moderate increase in real wages, which dipped by more than 9% last year. All in all, we expect growth to edge back into marginally positive territory by the end of the year. The average growth rate for 2016 is, nevertheless, expected to remain negative at around 0.6%.

Download PDF (566 kb)