NEW YORK, April 21, 2016 /PRNewswire/ -- The flow of capital from advanced economies into emerging market assets like stocks and bonds will increase sharply as central banks in the United States and Europe appear to run out of policy tools to address slowing GDP growth in their economies says George Taylor, Vice President of the Corporate Trading Division with Tokyo headquartered, Nihon International.
March 2016 marked emerging markets' best monthly inflows of foreign capital since June 2014 with some $36.8 billion pouring into equity markets chasing bargains left over from the January global stock rout that hit Asian and Latin American stocks particularly hard. By far the biggest contributory factor to the surge, however, was the apparent wariness at the US Federal Reserve, which looked reluctant to attempt to make good on the somewhat optimistic forecast for 3 or 4 interest rate increases in 2016.
The US central bank has dialed back the hawkish rhetoric and told markets that the potential backdraft from the global economic slowdown necessitates a cautious approach to interest rate hikes. Consequently, large institutional investors like BlackRock, PIMCO and Vanguard have resumed the hunt for return and yield they abandoned when the Fed ended its last quantitative easing program. Having spent much of the last two years repatriating funds to take advantage of the promise of higher US interest rates, they are, once again, looking to EM assets.
"The prospect of higher US interest rates has receded somewhat," says George Taylor. "The European Central Bank has only recently ramped up its quantitative easing program increasing its monthly asset purchases and taking deposit rates further into negative territory but it's had little in the way of a positive effect on inflation and economic growth in the Eurozone economies."
Volatility in Asian markets, particularly Chinese equities, has moderated in recent weeks. They received a boost from better-than-expected Chinese export data last week and retail sales numbers suggest that consumer confidence remained buoyant despite concerns about Q1 GDP. Indeed, those concerns were proven unfounded following the release of the official GDP, which showed the world's second biggest economy, grew by an annualized 6.7% in the first three months of 2016.
In stark contrast, the poor economic data from the US shows few signs that there might be improvement in the near term. Data related to industrial production and consumption, the central pillars of the US economy is growing progressively worse, so much so that Taylor believes 2nd quarter US GDP will show a particularly weak reading.
"We could be looking at a very lackluster read on Q2 GDP or even a contraction. Anything under 0.5% will more or less put paid to talk of US interest rate hikes for the rest of the year. With a narrative like that, we would expect to see the velocity and the quantity of funds flowing into emerging markets surge significantly. We're looking very closely at selected technology stocks on the Shenzhen Composite and at a handful of ETFs that track Malaysian and Indonesian stock indexes," says Taylor.
"We think there's a lot of value in EM stocks at the moment, certainly compared to their US counterparts which are looking quite expensive."
About Nihon International:
Nihon International is a top-tier independent wealth management and investment house that delivers high caliber financial services to institutions.
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SOURCE Nihon International J-LLC