Emerging Nations Huge Capital Outflows

FORECASTS & TRENDS E-LETTER
by Gary D. Halbert

April 12, 2016

IN THIS ISSUE:

1. Emerging Nations Huge Capital Outflows continue

2. Sovereign Wealth Funds Cut Allocations to Emerging Nations

3. “HANDING DOWN YOUR LEGACY” – A Special Gift For You

Emerging Nations Huge Capital Outflows continue

If you are wondering why the global economy struggled last year and so far this year, one only has to look at the trend in capital flows of emerging nations. After decades of positive capital inflows to most emerging economies, that trend has reversed sharply in the last few years.

Net capital outflows from emerging markets (EM) weren’t just bigger than expected last year, there’s more pain to come this year, according to the Institute of International Finance (IIF) which monitors such data.

Emerging Nations Huge Capital Outflows

Emerging markets faced a whopping net $735 billion in net capital outflows in 2015, the IIF, a global financial industry association, reported earlier this year. In October of last year, the IIF had projected $540 billion in net outflows in 2015, the first significant net negative figure since 1988. But in the end, the total outflow was almost $200 billion higher.

Emerging Nations Huge Capital Outflows
Emerging Nations Huge Capital Outflows

This year isn’t likely to be much better, IIF said, forecasting total net capital outflows of almost $500 billion for 2016. The finger is pointed squarely at China, which had larger outflows last year than all the emerging nations combined.

“While most emerging markets have been under pressure, the dominant driver behind this sea-change in emerging market capital flows has been flows to China,” the IIF said, citing“retrenchment” of $110 billion of non-resident capital.

“The 2015 outflows largely reflected efforts by Chinese corporates to reduce dollar exposure after years of heavy dollar borrowing, as expectations of persistent renminbi appreciation were replaced by rising concerns about a weakening currency,” it said.

Emerging Nations Huge Capital Outflows

“China also experienced rising resident capital outflows, as domestic investors sought to move money overseas, and so did other major emerging markets, including Korea, Russia, and South Africa,” IIF said.

Emerging market assets have certainly been unloved by investors: about $74 billion flowed out of global emerging market equity mutual funds in 2015, almost triple the $25 billion in outflows in 2014, according to data from JPMorgan. Asian emerging markets bore the brunt of the exit, with $39 billion flowing out of Asia equity funds (not including Japan) last year, the data showed.

That left emerging market assets trading at low valuations, the IIF said, but it noted that it isn’t clear if that’s“dirt cheap” or a “new normal.”

“EM corporate spreads are at their widest since 2009, while EM equities are trading at a 30% discount to developed markets on a forward price-to-earnings basis, and at a remarkable 65% discount on a cyclically-adjusted basis,” the IIF said.

“Although we expect 2016 to be another year of moderate EM growth—with continued risks from China and commodities prices—some recovery in EM flows and asset prices is possible if downside risks ease and investors start to price in better prospects for 2017. However, poor fundamentals will subject markets to continued high volatility,” it said.

Emerging Nations Huge Capital Outflows – Sovereign Wealth Funds Cut Allocations to Emerging Nations

The IIF noted another risk to flows into emerging market assets: sovereign wealth funds (SWFs).

“The sharp drop in oil prices since mid-2014 has prompted many sovereign wealth funds (SWFs) to adjust their portfolio investment strategies,” the IIF noted, estimating that SWFs increased their emerging market exposure by only around $30 billion in 2015, the smallest amount since 2010.

Overall, SWFs’ assets under management contracted for the first time in more than a decade, falling by over $30 billion to $7.2 trillion last year, the IIF said, noting the decline was particularly pronounced in oil-dependent Saudi Arabia, Norway and Russia.

“Our estimates show that SWFs funded by commodity export revenues reduced the size of their emerging market portfolios by over 8 percent in 2015 to $556 billion— although this was partly offset by the non-commodity funded SWFs, which increased their emerging market exposures by around $77 billion in 2015,” it said.

Emerging Nations Huge Capital Outflows

The bottom line is that capital outflows from emerging market economies substantially accelerated last year. While the IIF estimates that outflows will be smaller this year at around $500 billion, this trend will continue to strain EM economies. That, in turn, will limit our economic growth here in the US, especially in the export sector.

“HANDING DOWN YOUR LEGACY” – A Special Gift For You

Income tax time is less than a week away with the deadline extended to next Monday. That means you have probably gathered all of your financial and investment information to prepare your tax return or give to your accounting professional.

So what better thing to do than organize all of that key information in one handy digital place that makes it easy to update and make changes as needed. The solution: “Handing Down Your Legacy,” our free E-booklet that allows you to keep all of your important financial and contact information in one safe and secure (password protected) file.

Not only will you have all of your financial information in one digital place, Handing Down Your Legacyalso allows you to document your final wishes for loved ones to follow upon your death. No one likes to talk about death but the more information you can give your loved ones in advance, the better. Handing Down Your Legacy allows you to store all of your financial information and your final wishes in one secure place.

And best of all, it is absolutely free and there is no obligation on your part. So do yourself a favor and download Handing Down Your Legacy today and complete it as soon as possible. Also, feel free to forward this E-Letter to your family and friends who would also benefit from this useful resource.

Most Survivors Are Unprepared

Obviously, there’s the grief that comes with the loss of a loved one. If that weren’t enough, I once read thatover 90% of survivors are not fully prepared to deal with the financial and other issues that come up after the death of a loved one. I certainly believe it based on my own experience in the financial services business. It’s not uncommon for loved ones to contact us without a clue about where to even get started handling the issues related to the remaining estate.

Think about all the assets, investments, insurance policies, liabilities, etc. that you have and all the details related to them. Sometimes it’s challenging for us to keep up with just our own finances. Now imagine someone else, who is already dealing with your loss, trying to come in and figure it out without the benefit of your assistance. Think of the time and research that would take, and of the things that might slip through the cracks.

In many cases, one spouse is the financial partner, in charge of the checkbook, investments and most importantly, filing of important papers. The other spouse may only be minimally involved, signing on the dotted line when necessary and generally knowing where important records are, but not familiar with the details. It can be overwhelming and important things can get missed.

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