By Dion Rabouin
NEW YORK (Reuters) – Emerging markets will draw $1.1 trillion of capital flows from non-resident investors this year, the Institute of International Finance said in a report released on Tuesday, ramping up its estimates from earlier this year as a result of increasing global risk appetite and economic growth.
It will mark the first time since 2014 that the asset class will see more than $1 trillion of capital flows from foreign investors. The group also projects investment will grow to $1.2 trillion in 2018 as growth continues.
“With global growth broadly based and inflation still subdued, global risk appetite has been near post-crisis highs,” said Hung Tran, IIF’s executive managing director. “Moreover, growth is accelerating more quickly in emerging markets than in mature markets — typically a big pull factor for EM investors.”
Tran also noted that stronger-than-anticipated portfolio inflows to debt, equity and banking helped drive the group’s upward revision from $970 billion projected in June.
That projection was $290 billion higher than its first estimate this year in February, shortly after U.S. President Donald Trump took office. The organization listed possible American protectionism as its top threat to emerging market portfolio flow growth.
This marks a recovery to 4 percent of emerging market gross domestic product (GDP) from just 1.5 percent of GDP in 2015, IIF noted in the report, though that is still well below the pre-crisis peak of 9 percent of GDP.
Nearly all components that make up capital flows have risen in 2017, led by the doubling of portfolio debt inflows. Monthly portfolio inflows averaged $23 billion in the first nine months of 2017, almost double the $12 billion per month average during the same period in 2016.
“With EM external debt issuance at record highs and search-for-yield flows still a big factor, we expect portfolio debt inflows to rise from $102 billion in 2016 to $242 billion in 2017,” Emre Tiftik, IIF’s deputy director, global capital markets, said in the report.
Capital inflows from non-residents had fallen to a 12-year low in 2015.
Another major reason for the increase is the large reduction in emerging market resident outflows, mainly from China. IIF now anticipates 2017 will see net total emerging market inflows.
Outflows from China, the world’s second-largest economy, which leads EM economies in capital leaving local markets, rose to a record $725 billion last year.