Emerging Markets to See More Than US$1tn in Inflows in 2018
Bonds & Loans – Total non-resident inflows into emerging market debt and equities are forecast to swell 35% over 2016 volumes, touching US$970bn in 2017, and could pass the US$1bn mark by 2018 – the highest level since 2014, according to the IIF (Institute of International Finance).
Emerging markets attracted close to US$100bn in the first three months of 2017 alone despite a number of headwinds, including uncertainty around US government policy and the direction of the US dollar. An improving macro outlook, including stronger growth in the US and reduced commodity market volatility, is likely to drive sustained inflows through 2018, the organisation says.
“All of this moderation is due to China, which has used capital controls to clamp down on outward investment with some degree of success. That said, we expect a continued rise in South-South capital flows among emerging markets, particularly in the form of FDI and cross-border banking flows,” where China plays a strong role.
EM Bonds Buoyed by Institutional Investors
Portfolio flows into emerging market bonds in the first quarter of 2017 were driven mainly by institutional investors, who accounted for about 80% of inflows. Interestingly, emerging market ETFs – which were seen as a significant driver of fund flows during the 2Q2016 rebound in EM assets – accounted for less than 5% of inflows in the first quarter of this year. This institutional investor focus is especially relevant for Barak and the growing attraction to its continued AUM growth seen over the last 12 months.
The improving global macro outlook should be broadly supportive of EM fixed income, as will falling corporate default rates and more robust EM fundamentals, but some risks remain in specific markets. Rising non-financial corporate leverage in China and Chile remain key risks, while political and policy risk are likely to continue to weigh on Brazil, Mexico, Turkey, South Africa and Nigeria.