Strong Emerging Market Capital Inflows Signal Another Good Year

by Michael J. Howell20. January 2017 16:56

Emerging Markets rely heavily on foreign capital inflows for their performance. This is true even for China. Cross-border capital both directly fuels asset purchases and indirectly leads to greater domestic liquidity as foreign inflows are often monetised by the financial system. 2016 was a year of strong recovery in Emerging Market capital flows. These helped push domestic asset markets higher, but more importantly they have re-ignited a rising EM liquidity cycle. This expansion should continue into 2017. We reiterate our view that Asia is leading global markets under the sway of Chinese economic recovery and, thus far, is undented by fears of further US dollar strength. We also show in this report that EM capital flows follow three trends that feature: (1) China & Emerging Asia; (2) Brazil, India; and (3) South Africa, Russia and, possibly, Turkey. Momentum is currently shifting from the first to the second group, which are seeing a ‘catch-up’.

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