London-Emerging economies will see net capital outflows of around $350 billion this year, half of 2015 levels, the Institute of International Finance said on Thursday, cutting its early-2016 forecast of a $448 billion exodus.
The IIF, one of the most authoritative trackers of capital flows to and from the developing world, noted emerging markets had been pummeled in early-2016 but have since seen a sustained recovery in portfolio investment.
“The turnaround has been driven by a renewed search for yield in the face of the sharp decline in rates in mature markets fed by expectations of ever more dovish central banks,” the IIF said.
More than $10 trillion of bonds worldwide now offer sub-zero yields and Britain’s recent vote to leave the European Union has triggered bets that more stimulus will be unleashed in the UK, the euro zone and Japan and that the U.S. Federal Reserve won’t now raise U.S. interest rates again before 2017.
“The surprise Brexit vote reinforced this trend, pushing rates down to new lows,” the IIF said.
The group said total inflows into EM from ‘non-resident’ foreign investors rose to $122 billion in the second quarter of 2016, up from $48 billion in Q1, thanks to rising inflows into bonds and equities as well as reduced flight from China.
Overall, non-residents are expected to pump $550 billion into emerging markets, double 2015 levels. But these will be tempered by outflows from actual emerging market-based investors.
Equity and debt portfolio inflows rebounded to $33 billion in the second quarter of 2016 after three consecutive quarters of outflows, the IIF added.
Fears over China’s economy have abated somewhat but the country will still account for the lion’s share of outflows from emerging market residents, the IIF predicted. Overall, though, outflows are expected to be $420 billion, down from $675 billion last year.
The latest forecast is also lower than the IIF’s April prediction of $538 billion in net Chinese outflows this year.
Net outflows stood at $227 billion in the first half of 2016 – $206 billion less than in the second half of last year.
“Looking forward, we project a continued rise in private non-resident private capital flows to emerging markets in the second half of 2016,” the IIF added.
It warned, however, that risks could come from “a hawkish turn by the Fed or a loss of confidence in China’s capacity to keep the yuan on a stable path.”