The Business Times

Herd instinct among foreign investors in EMs as strong as ever: IMF

Published Mon, Mar 31, 2014 · 10:00 PM
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THE "herd" instinct among foreign investors in Asian and other emerging markets still appears to be as strong as ever despite a supposedly more discriminating approach towards assessing the economic fundamentals of such markets, the International Monetary Fund (IMF) said in a report published yesterday.

"After two decades of investing, there is little evidence that global investors have learnt more about emerging markets and become less prone to panics," the IMF concluded in its latest Global Financial Stability Report. The report comes as "tapering" of monetary easing by the US Federal Reserve gets under way, threatening to destabilise global capital flows. "Investors' tendency to mimic each other's choices, known as herding behaviour, has not declined," it noted.

The composition of global investors in emerging markets has changed over the past 15 years, making capital flows more sensitive to global financial shocks but policies to deepen emerging market financial systems can help manage risk, the report suggested. "Knowing who the investors are is critical for understanding stability of capital flows into emerging markets, especially when uncertainty over advanced economies' monetary policy remains high," said Gaston Gelos, an official in the IMF's Monetary and Capital Markets Department.

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