Global View Strong Emerging Market Capital Inflows Signal Another Good Year January 2017
Strong Emerging Market Capital Inflows Signal Another Good YearEmerging 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'.
CrossBorder Capital Ltd (CrossBorder) is a London based, FCA registered, independent investment firm founded in 1996. It is owned by its partners and has no affiliations with banks, stockbrokers or other financial institutions.
CrossBorder's core competence is the measurement and analysis of global liquidity flows. Liquidity is a source of funds, in contrast to money which is a use of funds. It is defined as the flow of cash plus credit, or more explicitly as savings plus the change in base money plus the change in bank credit. Liquidity is therefore a more comprehensive measurement of fund flows than the monetary aggregates used traditionally. Liquidity research is applied to determining the outlook for a range of asset classes including equities, fixed income, currencies and hedge fund styles over varying time horizons.
Central to this analysis is the monthly collection and analysis of balance sheet data from over seventy of the world's central banks to quantify the level and direction of liquidity in each country. This data is publicly available, aggregate as opposed to sample, and rarely significantly revised. It is also little used by investors, and CrossBorder's prime utility is bringing this set of data to investors in a timely and user-friendly way.
CrossBorder's insights rest on two philosophical assertions: first, there is a regular cycle of liquidity, and asset class price movements tend to move sequentially over the cycle. By measuring where we are on it, we can significantly reduce 'fat tail' outcomes in our predictions for asset price movements. Secondly, weightings of asset classes held by investors in aggregate tend to revert to the long term mean. By measuring the variance from this mean, we can understand whether a particular trade is 'crowded' or the reverse.
CrossBorder offers these insights both as the Liquidity Research research service, and in the form of systematically allocated in-house funds. Clients of the Liquidity Research service include leading banks, fund managers (both traditional and hedge) and insurance companies located worldwide. CrossBorder additionally manages and advises on tactical asset allocation products for third parties.
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