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IIF sees Second Wave of EM outflows possible on growth concerns after March blues

Emerging markets (EMS) should be bracing up for another round of outflows due to bleaker growth outlook on the coronavirus fallout, Washington-based International Institution of Finance (IIF) warned last week, after announcing EM’S worst capital outflow on record.

The institute said in addition to another wave of capital flight, there would likely be substantial valuation losses in Q1 2020 that would reduce foreign investor exposure to the region very substantially – a decline which combined with dovish global central banks is a stabilizing force for EM.

“At the same time, it is possible markets are re-focusing on the potential fallout of the COVID-19 shock for emerging and frontier markets, which – even after big outflows in Q1 – carries the risk of a second wave of outflows,” it said.

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IIF said its high-frequency tracking of non-resident portfolio flows to and from EM points to record outflows in Q1 2020 with the bulk of those outflows coming from EMS outside China.

The institute had earlier reported that EM securities suffered around $83.3bn in outflows during March, a record-breaking outflow episode worse than during the global financial crisis, the China devaluation scare of 2015 and the taper tantrum in 2014.

It estimated Debt outflows at $31.0bn, the secondlargest monthly outflow on record, the largest having occurred in October 2008.

On the equity side, IIF said the negative trend which it observed in March deepened, with outflows from China equities amounting to $12.3bn and flows to the remaining EM equity universe reaching -$40.1bn, the highest since it began publishing its trackers.

The flow reversal was due to the impact of uncertainty around the spread of the COVID- 19, large oil price plunge and financial shocks.

As growth outlook dampens for the global economy, EMS will find themselves in an unfavourable position.

According to the IIF, the position reduction foreign investors are experiencing in stocks and bonds is a stabilizing force for EM although it notes two arguments that weigh against that.

First, the institute notes that a decade of extraordinarily easy monetary policy in the G10 pushed large real money flows into EM– the hunt for yield – with foreign holdings up substantially over the last decade, especially where inflows have been heavy like in South Africa and Chile, it said.

Second, markets have so far been preoccupied with the economic fall-out from COVID-19 on advanced economies. “This focus may now be shifting to EM, which could set in motion a second wave of capital outflows, even after the unprecedented pace of outflows in Q1,” IIF said.

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