The strength of the economic fundamentals of emerging markets is behind the return of global capital inflows


Qatar National Bank attributed the return of global capital flows to emerging markets to the continued decline in the exaggerated valuation of the US dollar, the presence of strong macroeconomic fundamentals in most emerging markets compared to advanced economies, as well as the retention of small positions by institutional investors in emerging market assets.
And the bank stated, in its weekly report, that, according to the Institute of International Finance, there has been a significant shift in inflows from non-resident portfolios of emerging markets, which represent foreign investors’ investments in local public assets, indicating that after a period of negative or weak numbers throughout most of 2022. , the average of these flows for three months increased to more than 30 billion US dollars.
He added that these capital inflows contributed to achieving significant gains across emerging market asset classes, including an increase of more than 17% in total return on equity (MSCI Emerging Markets Index) and a 14% increase in bond yield (JP Morgan Global Bond Index). emerging markets) from recent lows.
The report pointed out that the decline in the overestimation of the price of the US dollar provides strong driving winds for emerging market assets, given that the dollar is a traditional safe haven, as the dollar is inversely related to most assets related to “taking risks”, including emerging market stocks and bonds, which involve It has a greater degree of risk compared to similar assets in more stable and developed economies.
He added that the value of the US dollar has already fallen by about 5 percent against major emerging market currencies since late last year.
The report expected that additional adjustments to the US dollar during the coming quarters would push capital outside the United States towards other economies, as the decline in the value of the US dollar is appropriate for global diversified portfolios, and this situation would be particularly beneficial for advanced economies that have currencies denominated at a lower level. of its value, such as Japan, Canada, the United Kingdom, the Eurozone and Australia.
The report indicated that institutional investors currently hold less than 10% of their stock portfolios in emerging markets, compared to a weight of 12% in the MSCI Emerging Markets Index, while 34% of total global revenues are derived from emerging markets. A meaningful change in allocation policies could lead to more global capital flowing into emerging markets.
With regard to the macroeconomic foundations of most emerging markets, which are stronger compared to advanced economies, the report emphasized that many advanced economies witnessed severe imbalances due to excessive stimulus policies in the wake of the Corona virus “Covid-19” pandemic and the Russian-Ukrainian war, which led to problems such as high debt. General and inflationary pressures, and the reason behind this was the need to protect the income of households and companies from large negative shocks.
He added that, on the other hand, most emerging market countries had less room to use economic policy to adapt to the pandemic shock, moreover, central banks in emerging market countries with a history of chronic inflation, such as Brazil and Mexico, faced pressure to implement interest rate increases. Proactively early in the inflation cycle, this proactive approach has been crucial in keeping inflation in check and maintaining macroeconomic stability.
Qatar National Bank concluded, in its weekly report, that emerging market countries are now under less pressure to tighten monetary policy, and may even begin early monetary policy easing cycles, as their economies have largely adapted to less benign global conditions.

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