The emerging countries' financial markets are going through a period of instability that started in spring 2013 when the Fed announced its intention to start normalising its monetary policy. The initial shock was big, resulting in the sudden, speculative exit of capital flows and the consequent depreciation in currencies. A second episode took place between January and February this year, sparked by the devaluation of the Argentine peso. This time the damage has been considerably less, both in terms of the size of depreciations and also in their geographical scope. In our opinion, this pattern of behaviour (which distances us from a spiralling crisis such as the one in the 1990s) is reasonable, given our forecasts for the main factors involved. Three elements should help stability be restored. Firstly, the fact that the Fed's tapering is happening gradually. Secondly, that the emerging economies themselves are making progress in adjusting their imbalances and subsequently reactivating demand. Thirdly, that the different groups of investors are calming down and now realise the attractive yield-risk combination offered by most emerging countries in the long term.
In this respect, an encouraging analysis has just been carried out by the Institute for International Finance, a benchmark organisation in the study of the relationship between international capital flows and emerging markets. After examining, country by country, the detailed movements in terms of each kind of instrument and investor, their diagnosis indicates that we are not witnessing a sustained mass exodus but rather episodes of selective sales by opportunistic investors or those with a short-term approach.
Specifically, the IIF places the main source of sales pressure during the last few months among retail investors on the bond market. This is the opposite to what happened in 2011 and 2012 when, given the low interest rates in advanced countries, numerous private investors became keen to try a type of asset they were not familiar with: namely emerging sovereign and corporate bonds. After the first few setbacks, they succumbed to the temptation to sell, whereas the behaviour of institutional investors (such as pension funds) has been much more stable. Other highly significant sources of financing, such as direct investment in shares and bank loans, have also remained admirably firm.
With regard to the forecasts, the IIF estimates that total net capital inflows overall will not fall too far and could be bottoming out right now, between the end of 2013 and the beginning of 2014. The recovery will be gradual but enough to achieve figures close to the all-time highs by 2015. One important warning: the discrimination that investors have started to show between regions and countries (depending on their vulnerabilities and corrective measures) will continue to differentiate this cycle from previous ones. East Asia has the best prospects, followed by Eastern Europe whereas, in Latin America, conditions have deteriorated due to Brazil's inflationary tensions and Argentina's instability.