IN THIS ISSUE:

1. Huge Capital Outflows From Emerging Nations Continue

2. Sovereign Wealth Funds Cut Allocations to Emerging Nations

Huge Capital Outflows From Emerging Nations Continue

If you are wondering why the global economy struggled last year and so far this year, one only has to look at the trend in capital flows of emerging nations. After decades of positive capital inflows to most emerging economies, that trend has reversed sharply in the last few years.

Net capital outflows from emerging markets (EM) weren’t just bigger than expected last year, there’s more pain to come this year, according to the Institute of International Finance (IIF) which monitors such data.

Emerging markets faced a whopping net $735 billion in net capital outflows in 2015, the IIF, a global financial industry association, reported earlier this year. In October of last year, the IIF had projected $540 billion in net outflows in 2015, the first significant net negative figure since 1988. But in the end, the total outflow was almost $200 billion higher.

Capital Flows

This year isn’t likely to be much better, IIF said, forecasting total net capital outflows of almost $500 billion for 2016. The finger is pointed squarely at China, which had larger outflows last year than all the emerging nations combined.

“While most emerging markets have been under pressure, the dominant driver behind this sea-change in emerging market capital flows has been flows to China,” the IIF said, citing “retrenchment” of $110 billion of non-resident capital.

“The 2015 outflows largely reflected efforts by Chinese corporates to reduce dollar exposure after years of heavy dollar borrowing, as expectations of persistent renminbi appreciation were replaced by rising concerns about a weakening currency,” it said.

“China also experienced rising resident capital outflows, as domestic investors sought to move money overseas, and so did other major emerging markets, including Korea, Russia, and South Africa,” IIF said.

Emerging market assets have certainly been unloved by investors: about $74 billion flowed out of global emerging market equity mutual funds in 2015, almost triple the $25 billion in outflows in 2014, according to data from JPMorgan. Asian emerging markets bore the brunt of the exit, with $39 billion flowing out of Asia equity funds (not including Japan) last year, the data showed.

That left emerging market assets trading at low valuations, the IIF said, but it noted that it isn’t clear if that’s “dirt cheap” or a “new normal.”

“EM corporate spreads are at their widest since 2009, while EM equities are trading at a 30% discount to developed markets on a forward price-to-earnings basis, and at a remarkable 65% discount on a cyclically-adjusted basis,” the IIF said.

“Although we expect 2016 to be another year of moderate EM 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. However, poor fundamentals will subject markets to continued high volatility,” it said.

Sovereign Wealth Funds Cut Allocations to Emerging Nations

The IIF noted another risk to flows into emerging market assets: sovereign wealth funds (SWFs).

“The sharp drop in oil prices since mid-2014 has prompted many sovereign wealth funds (SWFs) to adjust their portfolio investment strategies,” the IIF noted, estimating that SWFs increased their emerging market exposure by only around $30 billion in 2015, the smallest amount since 2010.

Overall, SWFs’ assets under management contracted for the first time in more than a decade, falling by over $30 billion to $7.2 trillion last year, the IIF said, noting the decline was particularly pronounced in oil-dependent Saudi Arabia, Norway and Russia.

“Our estimates show that SWFs funded by commodity export revenues reduced the size of their emerging market portfolios by over 8 percent in 2015 to $556 billion— although this was partly offset by the non-commodity funded SWFs, which increased their emerging market exposures by around $77 billion in 2015,” it said.

The bottom line is that capital outflows from emerging market economies substantially accelerated last year. While the IIF estimates that outflows will be smaller this year at around $500 billion, this trend will continue to strain EM economies. That, in turn, will limit our economic growth here in the US, especially in the export sector.

Wishing you well,

Gary D. Halbert


Forecasts & Trends E-Letter is published by ProFutures, Inc. Gary D. Halbert is the president and CEO of ProFutures, Inc. and is the editor of this publication. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of Gary D. Halbert (or another named author) and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Readers are urged to check with their investment counselors before making any investment decisions. This electronic newsletter does not constitute an offer of sale of any securities. Gary D. Halbert, ProFutures, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Past results are not necessarily indicative of future results. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.

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