Last year, $735 billion flowed out of emerging markets, Compared to $111 billion in 2014, this situation has not occurred since the late 1980’s and could be bad news for emerging markets. With all of this capital flowing out of emerging markets, this means that the money is being used to buy assets elsewhere. Unfortunately, since emerging markets are still building up their roads, infrastructure, factories, and technology to improve their own economies, they are extremely reliant on investment from developed countries. With money being taken out of these countries to be invested elsewhere, emerging markets could face a tough year economically.
Many invest in emerging markets because the high-risk nature can yield great rewards and can help to diversify one’s portfolio. Companies also utilize these markets to levy higher fees in their respected industries. Up until 2014, emerging markets were experiencing capital inflows. Although these inflows were less in some years than others, the general trend is that more capital has been flowing into emerging markets than out of them. A graph from Quartz demonstrates how extreme and substantial these outflows are in recent years. With many investors fleeing, the asset management firms who have benefited in the past from investments are struggling to keep interest in these emerging markets.
Part of the problem could be the crash in oil prices. Many emerging economies, such as Russia and Venezuela, rely heavily upon oil exports to provide for their economies and government budgets. Since their stocks now look much less appealing than ever before, many investors are now pulling their money out.
The Chinese economic slowdown is also making many investments seem uncertain. Since their government leaders often double as business leaders, they have also been loading up a great portion of the country’s private enterprises with debt. As their economy slows down and investors pull out, the value of China’s currency decreases and makes it more expensive for Chinese corporations to pay off debt obligations that have been denominated in other currencies. Due to currency manipulation, the Chinese yuan is much cheaper than the U.S. dollar, but is designed with a peg to move up and down with the dollar. It is still a relatively inexpensive currency compared to others, so there are still opportunities for China’s goods to become more competitive. Experts believe that the Chinese slowdown should be contained relatively within its own borders and the effect on the yuan from the capital outflow should help it recover much faster.
Fortunately for these emerging markets, capital flows work in relation to trade flows. Consequently, if a country has a net inflow of capital, as emerging markets are supposed to, it should have a net trade deficit. When these countries go into recession, investors pull out, the value of their currency decreases, their exports become cheaper, and a trade surplus occurs. This allows them to keep some economic stability until new investors come in to help them continue to build their infrastructure. But in order for emerging markets to succeed, investors will continually have to invest in these countries. According to experts from Northern Trust, although global investors are afraid of emerging markets, the stocks and bonds in these countries are among the most undervalued investments, and could be extremely beneficial in the long-run.
To find more information about various economic indicators, risks, and other statistics, please view our emerging markets insights page on globalEDGE!