Portfolio Investments in ASEAN Amid Policy Easing
By Kamen Parushev and Nataliya Micheva - Research Analysts
During the past decade emerging markets have attracted immense capital inflows from the international capital market which is abundant with liquidity, driving debt yields down to abnormally low levels.
Since the financial crisis Emerging Market Economies (EMEs) have provided attractive investment opportunities for international investors seeking to diversify away from the advanced economies mired in sluggish growth and with squeezed profit margins. The persistently high GDP growth differentials and interest rate spreads between the advanced economies and the EMEs have been widely recognized as key determinants of much of the international capital flows.
As buoyancy returns to the US and Europe, and the monetary policy normalisation gains momentum, the odds are high that many investors will consider reallocating some of their assets out of emerging markets with weak fundamentals.
Since May 2013, when the United States’ Federal Reserve announced that it would be gradually scaling back its quantitative easing programme, emerging markets have seen large capital outflows and rising interest rates pushing up borrowing costs.
This global trend had а negative effect on foreign portfolio investments (FPIs) in the Southeast Asian emerging economies. Among the four largest economies in the Association of Southeast Asian Nations (ASEAN) only one – Indonesia, managed to go through this period without seeing outflow of FPIs. Malaysia, Philippines and Thailand saw a negative flow of FPIs in at least three in the last four years between 2013 and 2016.
FPI is generally deemed to be more volatile as it is more susceptible to reversal as foreign investors’ risk outlook changes. In contrast, Foreign Direct Investment (FDI) generally involves a substantial involvement of the investor with the host entity, with direct investors usually committing significant amounts of capital and/or leadership into the investment. As such, FDI is less prone to sharp withdrawals.
Although there are various determinants of Foreign Portfolio Investment within the host country (including interest rates, inflation, and stock market performance), these types of investments are also exposed to external shocks and events affecting the availability of capital in the source countries.
With the US Federal Reserve adopting tighter monetary policy, and further rate normalisation hinted at (or executed) by other major Central Banks (the Bank of England and the European Central Bank raised interest rates recently in 2017), this may cause another wave of capital flight from EMEs in search of higher yields.
The figures for Q2 and Q3 of 2017, however, show some encouraging signs. 2017 may be the first in 5 years when all major ASEAN economies may record positive flows of portfolio investments from abroad.
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