In recent weeks there have been a number of indications of increasing financial stress in emerging markets around the world. These growing pressures have been acknowledged by the International Monetary Fund (“IMF”) as well as the Institute of International Finance…
In recent weeks there have been a number of indications of increasing financial stress in emerging markets around the world. These growing pressures have been acknowledged by the International Monetary Fund (“IMF”) as well as the Institute of International Finance (“IIF”), with officials expressing concern about mounting indebtedness and hot money outflows that present an increase in risk for key emerging markets around the world. Last week a similar concern was echoed again in market commentary from Mark Carney, the governor of the Bank of England.
Most observers seem to agree that the convergence of several macro trends bears responsibility for deteriorating fundamentals among emerging market economies. Perhaps the most significant contributing factor is the business slow down in China, which is rippling throughout the global financial system, driving down commodity prices, and reducing revenue for China’s suppliers and trading partners around the world. This slowdown comes on the heels of a massive build-up of external debt in the emerging markets, which occurred over the last few years, as hot money flowed into the emerging markets in search of yield.
It’s important to remember, then, that part of the challenge currently facing the emerging markets stems from the low interest rate environment that was put in place by Western central banks in the wake of the 2008 financial crisis. In their desperate bid to contain the financial crisis, the U.S. Fed and other central banks flooded the globe with trillions of cheap dollars, euros, yen and yuan, much of which eventually found its way chasing yield into the faster growing emerging market economies, such as Turkey and Thailand.
But now, with talk about rate increases from the Federal Reserve and Bank of England, those hot money flows are starting to reverse. According to the IIF, non-resident portfolio flows for the emerging markets fell into negative territory in August for the first time this year. As a result, some observers believe that capital outflows from emerging economies this year will most likely surpass inflows for the first time since 1988. Residents sending cash out of the emerging markets has accelerated amid recent financial market volatility while at the same time foreign investment is set to nearly halve from $1,074 billion in 2014 to just $548 billion this year.
As with any inflection point, it’s hard to know exactly what these trends portend. If the volatility continues and the exodus of hot money further accelerates, emerging markets could very well be heading for yet another full-blown financial crisis. We certainly hope that’s not the case and instead the world economy finds a way to muddle through this period of adjustment, moving towards higher interest rates in the developed world and slower growth rates for the emerging markets.
Not that we have a crystal ball, but looking at the trends in the Aurigin (formerly BankerBay) database, we see some encouraging signs in terms of deal flow that suggests there are still plentiful opportunities for investment in emerging markets around the world. Admittedly, our views are informed more by the quality of deals than the quantity simply because the monthly growth of listings on Aurigin may reflect more about the health of our platform than the health of emerging market economies themselves. Nonetheless, from real estate deals in Mexico to banking and household products manufacturers in Indonesia, Aurigin is replete with interesting investment opportunities spanning the globe, which give us cause for optimism that business activity in emerging markets is not exactly down for the count.