Brexit Might Just Stoke Greater Appetite for Emerging Markets

JPMorgan's Mowat: We're Positive on Emerging Markets
  • Institute of International Finance studied capital flows
  • Lower rates in mature markets push investors to seek EM assets

The U.K.’s departure from the European Union may drive even more investors fleeing the developed world of near-zero rates into the arms of higher-yielding emerging markets, according to a study by the Institute of International Finance.

While the referendum vote has increased political and economic uncertainty, its negative impact was felt mainly in central and eastern Europe and is expected to have limited spillover to other emerging markets, the IIF said in its monthly report on portfolio flows.

On the flip side, fewer concerns about the Chinese economy, signs of a turnaround in developing-nation growth and a recovery in commodity prices have rekindled interest for riskier assets with higher returns, according to the report.

“Brexit could even intensify appetite for EM assets among investors searching for better yields as rates in mature markets fall to ever lower levels, fed by diminishing hopes for growth in mature economies and expectations that dovish G3 central banks will keep policy rates lower for longer,” said Charles Collyns, managing director and chief economist at the IIF.

IIF estimates private, non-resident capital inflows into emerging-markets to reach $550 billion, double the rate of 2015, while outflows will be halved from last year’s level to $350 billion. The Washington-based group tracks flows for 25 emerging-market economies including Venezuela, Czech Republic, Hungary, Ukraine, and Lebanon.

Net capital outflows from China declined in the first half of 2016 to about $227 billion, or $206 billion less than outflows in second half of 2015, according to the report. IIF said it expects the People’s Bank of China to allow the yuan to depreciate opportunistically, barring “notably hawkish shifts in expectations” in the pace of the Federal Reserve’s rate hike or negative shocks to the Chinese economy.

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