Qatar National Bank (QNB) expects a significant increase in capital flow towards emerging markets in the coming quarters, if global financial conditions witness an easing on the back of rising confidence about the continued decline in inflation in the United States of America.
The bank confirmed in its weekly report that the steadfastness of these markets supports capital flows, as flows remained steadfast in the face of strong repricing operations in US Treasury bond yields, and this was supported by the expected shift in expectations regarding growth differences between the United States and emerging markets, and the beginning of the manufacturing cycle. Expansive globalism, strong fundamentals.
The report indicated that the current year began with a positive outlook for the performance of emerging markets in 2024, as the transition to easing monetary policy, which was adopted by the US Federal Reserve late last year, when advance directives were provided to reduce interest rates for the first time, led to a rise in investor sentiment on… At the global level, this matter, along with the steadfastness of global growth rates and the rapid decline in inflation rates, led to a change in the risk-aversion behaviors that were prevalent in 2022 and part of 2023.
He added, this positive economic background pushed global capital towards it, and according to the Institute of International Finance, non-resident portfolio flows to emerging markets, which represent the shares of foreign investors in local public assets, witnessed a significant shift from negative to positive territory in late 2023, and these flows led To the market recovery reflected in the strong rise in yields across various asset classes from the lows recorded in October 2023, including gains of 17.6 percent in stocks (MSCI Emerging Markets Index), and 13.9 percent in bonds (JPMorgan Global Bond Index emerging markets).
Despite negative inflation-related surprises, strong flows and returns persisted even after a significant revision in expectations associated with the Federal Reserve’s move to ease monetary policy. Expectations of a 2024 interest rate cut were reduced by nearly 200 basis points to less than 50 basis points, and a repricing of yields would American capital attracts capital from outside emerging markets to the United States or other developed markets, but the result is still different this time so far.
The report identified 3 main factors that support relatively high flows to emerging markets even in light of the significant increase in US Treasury bond yields, including: the expected trend of growth differences and the initial recovery in the global manufacturing sector, and the general improvement in macroeconomic imbalances in emerging markets, as well as the credibility of their policies. Economic.
First, it seems that the period of unexpected superiority in the economic performance of the United States has begun to shrink or change completely, and this is evident in the recent movements of the Citi Economic Surprises Index. Since the beginning of this year, for the first time, data surprises have become more positive at the global level and to a lesser extent in the United States. This indicates an imminent adjustment in growth expectations, which will favor emerging markets over the United States, and the stronger relative economic performance in emerging markets should lead to more foreign capital flowing towards them.
Secondly, the manufacturing sector is expected to be more supportive of emerging markets and the global economy excluding the United States in the coming months. After the stagnation of the global manufacturing sector, which was deep and continued for a long period since 2022, a positive shift towards expansion has begun. The global manufacturing sector purchasing managers’ index reached its lowest level in July 2023 and then improved, and activity turned into an expansion phase since February 2024.
