subject: Emerging Market Capital Flows – March 2011 [print this page] Emerging Market Capital Flows March 2011
The well documented increase in energy and food prices has led to a noticeable rise in headline inflation around the world and, unfortunately, has also led to policy rate hikes by several central banks, especially among emerging markets. So far this year, China, India, Thailand, Indonesia, Brazil and Russia have led efforts by emerging market countries to tighten monetary policy in order to keep inflation under control.
A general "rule of thumb" estimate is that a 10% rise in oil prices during one quarter would lead to an annualised 0.7% increase in world CPI and a 0.25% decline in global GDP.
Fortunately, despite these increases in interest rates, the weighted average policy interest rates in emerging Asia and Europe remain negative in real terms, and are positive but very low in Latin America.
In aggregate, emerging market policy rates are still some 200bp-300bp lower than levels prevailing in the year before the global crisis, when inflation was lower.
The upward trend in interest rates, albeit a modest increase, comes at a particularly bad time for many countries; especially those that are still struggling to fully emerge from the effects of the Great Recession as well as those needing to rectify their fiscal imbalances.
The increased uncertainty about the impact of sharply higher food and oil prices on emerging markets, coupled with fairly demanding valuations, has meant that emerging market equity markets have fallen by 5.2% since the beginning of 2011 (SA -5.7% in Dollars). In contrast mature equity markets have lost only 0.8% since the beginning of the year, mainly as a result of the troubles in Japan.
Given this divergence in equity market performance between developed and emerging economies it is not surprising to that capital flows to emerging markets have been reversed. So far this year, there has been a net outflow of nearly $15 billion from emerging equity funds (compared with a net inflow of almost $85 billion in 2010) and a much smaller net outflow of $2.6 billion from emerging fixed income funds (compared with record net inflows of $53 billion last year). The same pattern applies to South Africa.
Given the initial reaction to the Emerging Markets this year, March saw a return to last year's enthusiasm and we have seen capital inflows get back on track to where we expect them to be. Alliance is continuing to lead its peers, and the performance of our fund speaks for itself. We are constantly working our portfolio to provide the type of returns our clients have come to expect.
