Money Flows to Emerging World at Pace Unseen Since Taper Tantrum

  • Developing-nation funds post $6.5 billion weekly inflow
  • Inflows to emerging markets to keep recovering, IIF says

Capital inflows to emerging markets are growing at the fastest pace in three years as increasing odds that U.S. interest rates will remain lower for longer and stimulus measures from central banks in Europe and Japan make riskier assets more attractive.

Investors put $6.5 billion to developing equity and debt funds in the seven days through July 15, according to the Institute of International Finance based on the data from seven countries the agency tracks. It was the most since a $7.4 billion weekly inflow in September 2013, when the U.S. Federal Reserve’s surprise delay of the reduction of a bond-buying program triggered what is commonly referred to as the “taper tantrum.”

Investors are rushing into developing bond and equity funds as central banks and governments from South Korea to Italy have moved to prop up their economies with stimulus packages and support for banks after $4 trillion was wiped out from the value of global equities in the wake of Britain’s decision to leave the European Union. The referendum diminished the likelihood of an increase in U.S. interest rates, making emerging assets more appealing, analysts including Robin Koepke said in the report.

“In 2013, there was a concern about the end of easy money in the U.S., and the Fed decision to keep a bond-buying program gave a big boost to EM assets,” Koepke, senior economist at IIF, said by phone from Washington. “Now we are witnessing the policy response following the Brexit -- easier money in the mature economies, and because of that we have a step-down in market interest rates, which has supported asset prices in emerging markets.”

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 Washington-based research institute said last week. 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.

As investors had generally expected the Fed to start scaling back an $85 billion monthly bond-buying program in September 2013, then-Chairman Ben Bernanke put off a move, saying he needed to see more signs of sustained labor market gains. The program was gradually phased out and ended the following year.

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