NEW YORK/LONDON Emerging market stocks and bonds are heading for another year of outflows as global growth slows and corporate indebtedness rises, according to the Institute of International Finance.
Emerging markets had larger-than-expected net capital outflows of $735 billion in 2015, up from $111 billion in 2014. Another $448 billion of outflows is expected in 2016, according to an IIF report released on Wednesday.
"It seems like 2015 was even worse than we previously thought," said Charles Collyns, managing director and chief economist at the IIF. "And in 2016 we don't expect things to get much better."
The Washington-based IIF, an authoritative source of data on the developing world's investment flows, said $676 billion of outflows from China fuelled last year's losses and would be key this year. China's economy grew at its weakest pace in a quarter of a century in 2015.
"But the weakness extends well beyond China ... we have seen persistent portfolio outflows out of a broad range of emerging markets, with investors increasingly worried about growth prospects and high corporate indebtedness," Collyns said.
The IIF said Turkey, Brazil and South Africa are some of the countries most vulnerable. All suffer from weak macro policy, high foreign exchange corporate indebtedness and significant current account deficits.
India and Mexico are bright spots. But with China fears growing and Brazil and Russia in recession for a second straight year, investment returns are unlikely to recover soon, many fear.
"Premature aging of emerging markets may continue to weigh on growth prospects, and market volatility in early 2016 has weighed on risk appetite," said Hung Tran, executive managing director at the IIF.
Speaking to reporters, he said there was no sign of panic in the global market selling, but contagion could spread and a "true crisis" develop.
While many investors worry that rate increases in the United States will hurt emerging markets, the IIF doubts rising rates will have much effect.
"The impact of the Fed's shift to a tightening cycle may be limited as long as it is gradual, but flows to EMs will continue to face headwinds from growth and debt concerns," the IIF report said.
Emerging stock and bond markets are trading at discounts compared with developed markets, which some investors may view as a compelling reason to invest. But poor fundamentals will likely keep most investors away, the report said.
Tran said that while emerging market stocks on average were undervalued, China in fact may still be considered as over- priced. That means China selling might continue, feeding another bout of global market turmoil.
"I think the Chinese are beginning to run out of (policy) ammunition, which does raise concerns that add fuel to the fire," Collyns said.
The IIF's projections are based on its group of 30 emerging market economies.
(Reporting by Tariro Mzezewa; Editing by Larry King)
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Updated Date: Jan 21, 2016 00:30 AM