Emerging-market slump set to continue this year: IIF

Tokyo

THE magnitude of the capital flight from the world's emerging markets (EMs) in 2015 was greater than feared, the Institute of International Finance (IIF) said on Wednesday.

Against the backdrop of the China-led economic downturn and the US Federal Reserve's first interest rate hike in many years, net outflows from some 30 EMs hit US$735 billion during the year, a larger amount than previously thought, said a report by the Washington-based institution, which counts many of the world's leading private financial institutions among its members.

Meanwhile, the effective "de-rating" of EMs by investors, reflected in slumping currencies as well as equity and bond valuations, may represent a "new normal" for these markets, the institute suggested.

Charles Collyns, managing director and chief economist at the IIF, said: "The main factor driving the sea change has been heavy outflows from China, reflecting growth and currency concerns.

"But the weakness extends well beyond China, as we have seen persistent portfolio outflows out of a broad range of emerging markets, with investors increasingly worried about growth prospects and high corporate indebtedness."

The IIF said it does not expect much improvement in 2016, and projects net capital outflows of US$448 billion for the year.

IIF's executive managing director Hung Tran said: "Emerging-market equity and debt markets are now trading at very steep discounts to mature economies, which could be viewed as attractive by some investors for strategic re-entry.

"However, poor fundamentals will subject markets to continued high volatility."

Countries that are at risk for particular pressure in the event of further retrenchment are those with large current account deficits, high levels of foreign-currency corporate indebtedness and questionable macro policy frameworks, the IIF said, citing Brazil, South Africa and Turkey in particular as examples.

With a further slump in commodities prices, growing concern about China's growth prospects, political turmoil and the Fed liftoff - a key questions for EM investors in 2016 will be whether the steep markdown in bond, currency and equity markets has run its course, and whether a meaningful turnaround is in prospect," said the IIF.

"Although we expect 2016 to be another year of moderate emerging market growth, with continued risks from China and commodities prices, some recovery in EM flows and asset prices is possible if downside risks ease and investors start to price in better prospects for 2017."

Poor fundamentals will subject markets to continued high volatility," it added.

Meanwhile, the ongoing slump in EM currencies, down almost 19 per cent since end-2014, has left real effective exchange rates well below their 2005-to-2015 averages for many countries, said the IIF, citing China as a notable exception.

"Taken together, these valuation trends amount to an effective de-rating for emerging markets as an asset class, raising the question of whether this may constitute a 'new normal'."

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