Political Risk Latin America Blog @PolRiskLatam

G20 guest post: capital controls won’t stop inflows

Posted in News and Articles, Political Risk by politicalrisklatam on November 10, 2010

by Koon Chow, emerging markets strategist, Barclays Capital, for Financial Times – Beyond Brics, November 10th, 2010.

We think there is a low probability of new concrete measures being announced at the G20 meetings this week either to correct global imbalances or to relieve upward pressure on emerging-market (EM) currencies.

The US has already committed to another phase of quantitative easing, and is very unlikely to accept constraints on its monetary autonomy for the convenience of emerging-market policy authorities. The liquidity injection this entails together with low yields in the developed economies are likely to further push the asset diversification flows that we have seen this year, with emerging markets among the prime beneficiaries.

Emerging markets have taken up US$65bn of equity portfolio and $38bn of bond portfolio inflows in the year to date, with more inflows probably on their way. Emerging market exchange rates and local asset valuations are likely to be pushed further upwards.

Moreover, the ‘push factor’ created by low yields in developed economies is only half the story. Emerging markets (EM) are an attractive long-term destination to investors for their strong growth prospects, low public and private sector debt levels, and generally strong external payments positions. EM GDP this year is on track for 7.7 per cent growth against 2.4 per cent in the developed economies. Global investors are, in our assessment, structurally under invested in EM, by our estimates, no more than 10 per cent of the assets under management of the global institutional investor base are in EM. Given that these investors have assets of around $119 trillion, a small shift would have a very large impact on EM asset prices.(continue reading… )

 

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