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Asia faces woes of capital movements

Publication Date : 21-02-2014

 

The flow of capital from developing to developed markets will be the main cause of instability and fluctuation for emerging markets this year, foreign and domestic economists said yesterday.

This year is expected to be challenging for emerging markets, especially for countries without a strong financial structure, because of the recovery of the world's major markets, namely the United States, Europe and Japan, and especially Washington's tapering of its quantitative easing (QE) policy, which causes capital from developing countries to return to developed ones.

Bandid Nijathaworn, chairman of the Thai Bond Market Association, told the "Krungsri Outlook" conference yesterday that the outflow of capital had forced the growth of emerging markets, including China, to slow down.

Countries with wide deficits, high inflation, low reserves and heavy dependence on foreign funds, such as Turkey, Argentina and South Africa, will have the biggest problem because the rate of outflow will be much more dramatic than from other countries with strong financial foundations.

The fast outflow of capital will also weaken the currencies of countries with lower immunity, which further depresses the export sector of those countries and eventually brakes their growth even further.

The trend of global interest rates is on the rise because emerging markets are trying to sustain the strength of their currencies amid the capital outflow. Emerging markets including Thailand should spend more time strengthening their financial structure during this trend of rising global interest rates, Bandid said.

Bond market

Investors should patronise the bond market this year because there is less fluctuation than in the stock market and bond investment is more forward-looking, which means the political and outflow problems, which are deemed as short term, would have less effect on its market.

The bond market will continue to grow this year, but not as dramatically as in recent years, and should be able to expect a return of 4-6 per cent this year, he said.

"Investors should invest in the bond market now before global interest rates go up. Companies that have already succeeded in the domestic market should look into investing outside the country because of the opportunity presented by the coming of the Asean Economic Community and the current instability in the country," Bandid said.

Brian Baker, chief executive of Pimco Asia, said the biggest problem for emerging markets this year was the US Federal Reserve's tapering its QE programme and the switch from former chairman Ben Bernanke's QE policy, which is about to finish this year, to his successor Janet Yellen's "forward guidance" policy.

"US monetary policy has a great influence on the world's markets because 76 per cent of all the federal reserves around the world use the US dollar as the means for buying and saving," he said.

"The key event in the US for 2014 that investors should look out for is how effective Yellen's 'forward guidance' can be and can they keep their interest rate low," he said.

Other key events that investors should look out for in the world's giant markets, namely the US, EU and Japan, is whether they will be able to fix the long-term structural problems.

 

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