Davos (Switzerland): More than a trillion dollars of investment flows has fled emerging markets over the past 18 months but the exodus may not even be halfway done, as once-booming economies appear trapped in a slow-bleeding cycle of weak growth and investment.
While developing economies are no stranger to financial crises, with several currency and debt cataclysms infecting all emerging markets in waves over recent decades, leaders gathering for this year’s World Economic Forum in Davos are fearful that this episode is much harder to shake off.
Seeded by fears of tighter US credit and a rising US dollar, and coming alongside a secular slowdown of China’s economy and an implosion of the related commodity ‘supercycle’, there’s growing anxiety that there will be no sharp rebound at the end of this downturn to reward investors who braved out the worst time.
According to the Washington DC-based Institute of International Finance net inflows in 2001-2011 totaled nearly $3 trillion.
Some of this is starting to reverse as last year saw the first net capital outflow since 1988, a $540 billion loss, says IIF which predicts more flight in 2016.
Other forecasters such as JPMorgan reckon nearly a trillion dollars have fled China alone since mid-2014; its central bank reserves alone declined more than $500 billion last year.
There are some bright spots such as India and Mexico. But with China fears on the rise and Brazil and Russia in recession for the second straight year, investment returns across the sector are unlikely to recover soon, many fear.
Emerging stock market performance has lagged developed peers for five years now, and corporate earnings have shrunk for more than four years, Morgan Stanley has calculated. This is the longest decline in the MSCI equity index’s history, MS says, noting the longest prior earnings recession in the asset class was after the 1997 crisis.
