NSR H2 2019 Excerpts - EM Capital Flows - Break out the champagne
- In this afternoon’s cut-out of our core strategy document – The Nigeria Strategy Report, we review developments pertaining to the direction of FPI flows across emerging and frontier markets. In addition to delineating the drivers of portfolio flows over the first half of 2019, this section presents our outlook on drivers of FPI flows for the rest of the year.
- Rebounding from paucity of flows over H2 18, total net FPI flows to EMs more than tripled to $193.9 billion in the first half of 2019 (from a low of $65.1 billion in H2 18), with 77% ($148.7 billion) of the total flows channelled towards EM debt counters while equities ($45.2 billion) continues to account for a meagre share of the pie. Despite prospect of further escalation in trade conflict between US and China and its reverberating effect on broader EM market, a change in narrative by the US FED to a more dovish stance and reduced imbalances in EM economies relative to prior year triggered foreign investors’ appetite to attractive carry trades in emerging market assets. The surge in FPI flows cuts across all regions, as total FPI flows into Asia, Latin America, Emerging Europe more than doubled over the period, while net flows into Africa and the Middle East turned positive from a net outflow in the prior year.
- Going forward, anchored on slowdown in both GDP growth (Q1 19: 3.1%; FYE 19: 2.3%) and inflation (Average CPI 19: 1.7%; Average PCE 19: 1.6%), the US FED signaled dovish tone at its last meeting with market expecting at least 50bps cut in the Fed rate by its December meeting. Furthermore, ECB’s body language has been one of dovishness. Especially given its recently introduced quarterly targeted long-term refinancing operations (TLTRO-III) set to kick off in September 2019 and ending in March 2021 – with the sole aim of encouraging private sector lending. Consequently, with the accommodative stance across DMs, we see scope for portfolio flows into Emerging markets, with IIF forecasting 11% YoY growth to $344 billion over 2019.
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