EMs Set for $501 bn Net Outflows in 2016
London: Emerging market stocks and bonds are set for another $501 billion of net outflows in 2016, despite a pick up in risk appetite in March, the Institute of International Finance (IIF) said on Friday.
This figure is down from $755 billion of outflows in 2015, with the improvement driven by some recovery in non-resident capital inflows. These are seen climbing to $560 billion this year, up from $240 billion in 2015. However, heavy capital outflows by residents are expected to keep overall flows in negative territory, the IIF said.
The Washington-based body, one of the most authoritative trackers of foreign capital flows to and from the developing world, noted that asset prices and inflows had revived in March, helped by attractive EM valuations and underweight positions. MSCI’s benchmark emerging equities index rallied13%, its best monthly performance since May 2009, with an estimated $36.8 billion pumped into emerging markets stocks and bonds. This helped the asset class end the quarter with strong gains. However, the EM revival would be moderated by continued headwinds such as low commodity prices and a secular shift away from manufacturing to services, the IIF cautioned.
“Despite reduced tail risks, we do not see the improvements in overall fundamentals in emerging market economies that would be needed to underpin a more robust revival of EM flows,” it said.
Moreover, valuations are now less compelling after the strong first quarter rally and underweight positions are less extreme, it noted. Net outflows will continue to be dominated by China, with some $530 billion projected for 2016, down from $675 billion last year, the IIF added. This should allow reserve losses to diminish, helping to contain fears of a disorderly renminbi depreciation, said IIF executive managing director Hung Tran.