On the back of the PBOC’s one-off yuan devaluation in August and the the belief the US Federal Reserve will still lift interest rates this year, capital outflows from emerging markets rose sharply during the past quarter based on data released by Institute of International Finance (IIF).
According to analysis conducted by CBA’s senior currency strategist Joseph Capurso, capital outflows from emerging markets totaled $40 billion over the quarter, the largest three-month decline registered since the December quarter of 2008 – the height of the global financial crisis.
Capurso notes that capital outflows from Asia have now occurred for three consecutive months, something that he puts down to “growing concern about China’s slowing economy”.
While prolonged capital outflows from emerging markets are rare – something demonstrated in the chart below tracking capital movements in and out of emerging markets based on IIF data – Capurso offers an ominous warning on the outlook should the Federal Reserve lift interest rates later in the year.
“Historically, more emerging markets enter a crisis one year after the Fed raises rates,” he notes.
“Investors should brace themselves for continued volatility and the possibility emerging market crises happening sooner rather than later.”
Whether or not the Fed raises rates rates later in the year, financial market volatility looks set to remain for the foreseeable future. As history suggests, Fed tightening tends to predate financial crises in emerging markets. On the flip side, should the Fed not tighten policy in the months ahead, the heightened levels of uncertainty may also create volatility in asset markets.
Uncertainty breeds uncertainty, something that the Fed, emerging markets and investors in general have quickly rediscovered over recent months.