After a disastrous year in 2013, characterized by capital outflows from emerging economies, global investors’ confidence in emerging markets seems restored in 2014. More and more money has been flowing to Latin America and Asia, causing rising regional stock indices and lower bonds yields. For example, the stock index of India has reached a near-record level. This is in sharp contrast with developments last year when emerging stock indices, exchange rates and (most) interest rates increased.
Previously, between 2009 and 2013 emerging economies in Latin America and Asia witnessed inflows of cheap money from the United States and Europe as interest rates in the West were low. Emerging markets offered much more lucrative assets to international investors. But this changed when the US Federal Reserve started to speculate (in May 2013) about an end to its massive bond-buying program, implying an end to the era of cheap US dollars.
Investors’ renewed confidence in emerging markets can be seen in the performance of the MSCI Emerging Markets Index. This index increased 13 percent since March 2014, while the MSCI World Index only gained about 5 percent in the same period. Wim-Hein Pals, Head of Emerging Markets at Robeco, said that the real economies of these emerging markets have improved. After the elections in Indonesia, India and South Africa, investors can rely on increased political certainty. Meanwhile, Chinese President Xi Jinping announced economic reforms to boost economic growth in the world’s second largest economy. Pals added that investors are looking for alternatives as stock indices on Wall Street have reached record high levels. However, emerging markets specialist at ING Maarten-Jan Bakkum, said that the economic fundamentals in these emerging markets are still not convincing and there are few sign of real reforms.
Meanwhile, the five BRIC countries will take measures to avert the impact of volatile capital flows by establishing a USD $100 billion fund aimed at stabilizing currency markets. Furthermore, the BRIC countries will establish the BRIC Development Bank (BRIC Bank) through which the countries aim to make substantive progress on cooperation in promoting BRIC countries. This bank will commence operations in 2016 and is expected to reduce dependence on the US dollar and euro. As such, the BRIC Bank may become an alternative to the (western-dominated) International Monetary Fund (IMF) and the World Bank.