Emerging markets (EMs) securities suffered their worst outflows in 34 months over the escalation of trade dispute between United States and China combined with heightened fears of global economic slowdown.
Investors pulled out $13.8 billion from EM assets in August compared with $24.3 billion that made way to the said markets in the preceding month, according to data by the Washington-based Institute of International Finance (IIF). August flows are the lowest since November 2016.
Unlike previous outflow cycles, where the dynamics between debt and equity flows were clearly different, August saw both equity and debt securities experience large outflows.
According to the global finance body, EMs recorded negative flows in 18 of 21 trade sessions last month. And while China’s equity flows gained $1.5 billion, fears of a global recession and the trade conflict translated to $15.6 billion outflow for non-Chinese equities.
Big central banks have embraced monetary accommodation by slashing policy rates to spur global growth, depressed by the on-going trade dispute, geo-political tensions and Brexit-related uncertainties.
However, analysts at American-based investment bank, Morgan Stanley, say neither monetary nor fiscal stimulus is sufficient to prevent the next global recession.
Their argument being that the combination of low interest rates, escalating debt levels and trade-policy uncertainty has created an environment that neutralizes the potency of monetary policy.
“Declining natural interest rates have meant that monetary policy by itself won’t be enough to raise aggregate demand and lift inflationary expectations.” They asserted.
Morgan Stanley further posited that fiscal stimulus including payroll tax cut and deficit financing employed by some advanced economies to stimulate growth may print disappointing result.
EM attracted just $300 million debt flows last month, 75 percent less than $1.2 billion attracted in July. Outlook for non-China EM looks bleak given the large amount of hot money that has already gone to EM in recent years, which IIF said it has resulted in a structural drag on new inflows.
The negative outcome was uniform across all regions, with the Asian region suffering the most equity outflows of $7.6 billion, while African and Middle East recorded most debt outflows ($1.9bn).
There are expectations that capital flows to EMs might rebound to positive territory in September as China have unveiled intention to halt retaliation and resume talks with US.
Meanwhile, Nigerian stocks recorded a two-day bullish run Monday with 0.14 percent gain, cutting year-to-date losses to 12.4 percent.
Yields on Nigeria’s 10-year benchmark bond remained unchanged at 14.31 percent Monday, on buy interest from local investors in short to medium term debt notes coupled with waned selloffs by foreign investors. The local debt market is expected to mirror the bullish trend in Treasury bill market on the back of improved system liquidity.
ISRAEL ODUBOLA
