Robust Emerging Markets Continue to Attract Investments
The Institute of International Finance reported that US$13.9 billion was invested in emerging markets in October. The vast majority of the inflows (US$9 billion) went to Asia as economies in the region continue to expand.1 The success of emerging markets is the direct result of their individual economic factors and their interactions with other emerging and developed nations.
The Three C’s Impacting Emerging Markets
One of the most interesting takes on the outlook for emerging markets comes from Jane Fraser, Citigroup’s CEO for Latin America who penned her theory of the “Three C’s”: China, commodities and capital exodus. Each of the “C’s” will affect emerging nations differently. India is an example of a developing nation that checks all the boxes of the “Three C’s” in a positive way. Trade relationships with China are on an upward trend and bilateral trade will be near US$80 billion in 2015.2 The fall in commodity prices has kept Indian inflation under control helping the Reserve Bank of India achieve its targets. The Canada Pension Plan Investment Board recently announced that it will invest US$6 billion in India by 2022 putting a positive spin on the final “C” in Fraser’s theory.3
Central Banks Continue to Drive Volatility
Central banks have dominated market headlines in 2015 as their interventions have caused shifts in the global economy’s investment flows. Interest rate divergence favours emerging markets as developed economies are still stuck at near-zero rates. The higher yields offered on debt issued by nations such as India and China, which have shown resilience in the face of economic headwinds and have adapted with structural reforms, will continue to increase the appeal of emerging markets.
Developed Economies Facing Tough Policy Decisions
Indecision from the Federal Reserve as to when they will eventually raise interest rates has added volatility to global asset classes. During the October Federal Open Market Committee (FOMC) statement the U.S. central bank has hinted at a possible rate hike in December. The fact remains that the U.S. economy is still facing headwinds that could delay the monetary policy decision. The lack of action from the Federal Reserve has forced other central banks to increase their efforts to boost growth. Four central banks have intervened in the last four days.
The European Central Bank signalled that it would increase its record quantitative easing program before the end of the year. While central banks in England and Switzerland published dovish messages to cool down market expectations. The People’s Bank of China also attempted to spur growth by recently cutting interest rates as well, a now common monetary tool being used by central banks to revive economic development.
Emerging market central bankers seldom get mentioned as the architects of their nation’s growth, but they have a large responsibility in steering the economy with the use of their monetary policy tool kit. Today, a large part of utilizing those tools revolves around their ability to manage the expectations of the market with good communication skills. In this regard, India could not ask for a better steward than Reserve Bank of India’s Governor Raghuram Rajan, who has skilfully regulated the state’s interest rates, setting India on course to be the fastest-growing economy in the world.
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1 Institute of International Finance, Capital Flows
2 The Economic Times, India-China trade has potential worth $80 billion in 2015: ICCCI.
3 CPP Investment Board, Canada Pension Plan Investment Board Opens Investment Office in India.