Emerging-Market Inflows to Pass $1 Trillion--but Will the Demand Last?
By Georgi Kantchev
The amount of money flowing into emerging markets is set to top $1 trillion in 2017, the biggest flow of funds in three years, as economic growth in these countries and low returns in the developed world bump up demand for assets in many developing nations.
Nonresident capital flows to emerging markets will rise to $1.1 trillion in 2017 and edge up to $1.2 trillion in 2018, according to the Institute of International Finance, a trade group that represents more than 500 of the world's biggest banks, hedge funds and other financial firms.
Still, risks remain. Geopolitical tensions could escalate, while central banks in the developed world may move faster than expected when tightening the monetary policies that have pressured returns in home markets. Investors could also be put off emerging markets if the dollar continues its recent upswing or if President Donald Trump follows through on plans to implement protectionist policies.
For now, though, money is continuing to move into emerging markets.
"This year has been sort of a sweet spot for emerging markets," said Kevin Daly, fund manager at Aberdeen Standard Investments. "The global backdrop has been conducive and at the same time we have seen improvement in EM fundamentals including external balances and currencies."
The MSCI Emerging Markets Index of stocks has risen around 26% this year, double the gains of the S&P 500, and is on pace for its best year since 2009. Currencies like the Mexican peso and Brazil's real have risen this year and so have some developing country government bonds. Investors in emerging-market hard-currency bonds have made a return of 7.5% so far this year, according to Bloomberg Barclays bond indexes. Investors in local-currency government bonds have fared even better, reaping returns of 11.6%.
Emerging-market assets had underperformed against their developed-world peers for more than two years.
The IIF said Tuesday that on top of stronger inflows from abroad, there was less outflow from people in emerging markets. The group estimates that resident capital outflows have dropped to $770 billion from more than $1 trillion last year, driven by a large decline in money leaving China. As a result, emerging markets have swung from large net outflows in recent years to a small net inflow.