Exodus of Capital


The enormous amounts of global capital that flowed into emerging economies in the six years since the 2008-09 financial crisis is in most countries now either slowing to a trickle or reversing its flow and looking for a safer haven back home in developed economies.

The 15 largest emerging economies experienced their biggest absolute capital outflow since the crisis in the second half of 2014, as a strong US dollar drove emerging market currencies into a downward spiral and investors grew nervous over the prospects of a tightening in US monetary policy.

The International Monetary Fund said that the total foreign currency reserves held by emerging markets in 2014 – a key indicator of capital flows – declined for the first time in two decades to $US7.7 trillion, with the trend continuing into this year.

Without steady capital inflows, emerging markets have less money to pay their debts, finance their deficits and spend on infrastructure and corporate expansion.Emerging market economic growth has slipped to its slowest pace since the 2009 slump.
From an emerging market perspective, the current slowdown differs in character from the slump of six years ago during the financial crisis.

The IMF’s effort to identify why investment is declining in emerging markets using real data from 38,000 companies has a mixed message for Asia, which is more diverse than other emerging-market country groups.

The Asian downturn is much less due to lower commodity prices, but much more due to broader factors, especially a generally lower outlook for company profit increases thanks to the lowering of medium-term growth and large exposure to USD denominated debt.

Among companies in emerging markets, nonfinancial-sector debt in 2014 hit a record 83% of the gross domestic product of these countries. Several recent high-profile corporate defaults have further raised investors’ concerns. In January, China’s Kaisa Group Holdings Ltd. became the first Chinese property developer to default on bonds sold outside China, heightening market fears about the Chinese economy.

However, not all emerging markets are the same. So an investor wanting to go into these markets – in what is today essentially a contrarian play – should identify and narrow down the choicesthan simply invest in a broad-based emerging market fund. Buy low, sell high – is the only investment rule that investors need to know. But the big problem right now is trying to get a handle on which markets and assets are good to invest inandthe potential risks involved. Talk to the experts at Gladstone Morgan to explore more on the trends and opportunities arising in these markets.

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