A divine light over emerging markets
Arobust global appetite for risk paid dividends for emerging markets in 2017. According to EPFR data, capital inflow into EM funds reached $192 billion, breaking previous records.
The picture was much less optimistic just a few years ago. From 2013 to 2015, as the Fed signaled monetary tightening, $117 billion fled the world’s second-tier economies. But with the capital inflow of $43 billion into bonds in 2016, the interest increased. Equities, however, were still not that attractive.
The capital inflow into EM bond funds broke a record at $113 billion in 2017 while inflow into equities reached its highest level after 2009 and 2010 at $79 billion.
What accounts for th s renewed nterest n EM assets?
We see three main reasons for the increases:
(i) the widening gap between the growth rates of developing countries compared to developed countries;
(ii) the narrowing gap of inflation rates between developing and developed countries, which has reached an all-time low;
(iii) an expansionary financial climate, despite the Fed’s gradual increase in interest rates.
High growth rates support capital inflow into EM equity funds while narrowing inflation rates are a boon for bonds. Lastly, financial conditions that encourage expansion are beneficial to all
W ll t cont nue n 2018?
It’s too early to tell. But the performance of the first week indicates that money inflows will indeed continue. Inflation being low despite strong growth, and a weak dollar with low bond interest rates, will make emerging markets attractive to global capital searching for high yields.
The 2017 picture was somewhat more volatile in Turkey. Social unrest in the Middle East and the deterioration in relations between Turkey and key western nations delayed the demand for Turkish assets but as the capital inflow into emerging markets continued, Turkish asset prices also fell into an upward trend.
We expect this trend to continue through 2018. Because of Turkey’s troublesome regional geography, confrontation with some western nations will continue. Attacks like the trial of Reza Zarrab, the first part of which is over with a guilty verdict against Hakan Atilla, may also effect Turkish assets negatively in the coming days.
But such shocks won’t be enough to knock the Turkish economy out of its ascending orbit. Strong growth, low government debt and a robust banking sector will continue to attract hot money and support asset prices. Turkey remains a star in the EM constellation, and it will continue to shine.