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22 I Companies & Markets bne October 2020
reason may be growing differentiation in flows to EM, with some markets seeing outflows that continue to build. This picture of increased differentiation is in line with our work on currency valuations, which points to persistent overvaluations for some countries," IIF said.
Russia weathers the storm
The steady, but modest, inflows have lifted the Russian stock market, which lost half of its value during the worst of the sell-off as bne IntelliNews reported on the occasion of the dollar-denominated Russia Trading System's (RTS) 25th birthday yesterday. While the Russian market remains down some c.18% YTD, two sectors – metals & mining and consumers – have clawed back all their losses and are currently ahead of their starting point at the beginning of the year (7% and 6% respectively).
“In a little reported story, Russia has actually been attracting
FDI in 2019, and not just money reinvested by foreign companies that are already operating in Russia”
Capital Economics reports that the “other” category of fund flows collapsed at the height of the crisis, but FDI and banking sector flows appear to have held up better.
In a little reported story, Russia has actually been attracting FDI in 2019, and not just money reinvested by foreign companies that are already operating in Russia, which is the major source of FDI. The net inflow of FDI into Russia in 2019 jumped to $32bn according to Bank of Finland Institute for Economies in Transition (BOFIT), and similar inflows are expected this year.
Glossop argues that FDI is less elastic than other forms of capital and therefore less easily withdrawn during bouts of market turmoil. “And the large-scale monetary easing across the world has helped to prevent a global financial crisis and sudden stop in cross-border banking sector flows,” he adds.
IIF concurs. Its daily tracking of non-resident portfolio flows to EM found that the outflows in March exceeded anything on record, especially when looking at EM excluding China.
“However, the immensity of Fed easing, which first lifted US equity and credit markets, is now also filtering into emerging markets, where our daily tracking of non-resident flows is back in positive territory in the second and third quarters of 2020,” Brooks and Fortun said, adding that Turkey remains the exception, as it is still seeing outflows.
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While the net inflow in the July data is encouraging, analysts are less sure about what will happen going forward. To add to the confusion in Russia’s case, in the meantime Belarus has been plunged into its biggest political crisis since Belarus' self-appointed President Alexander Lukashenko came to power 26 years ago and Russian interference in that story has again unnerved investors as more sanctions against Russia may be in the works.
Turkish outflows
Turkey is in the same boat, but for difference reasons. The government in Ankara has been battling to stave off yet another currency crisis, but now it has burned through an estimated $100bn of reserves and also tapped the banking sector for dollars it is starting to run out of ammo. Unlike the other EMs, investors into Turkey have been net sellers. As bne IntelliNews reported, Turkish equities saw the biggest outflow for more than 15 months in the middle of August, as a new crisis looms.
“Significant net sales of Turkish assets by non-residents over the past month reflect the growing threat of a currency crisis there. Selling pressure has been most acute in Turkish equities, although non-residents have also been net sellers of government bonds,” says Glossop.
Foreigners' Net Purchases of Bonds & Equities (US$bn, 1m Sum, based on daily data)
Sources: Refinitiv, Capital Economics
IIF’s tracker sheds a bit more light on the issue, saying that when factoring in all the variables the outflow from the Turkish market exceeds what would be expected from
a crisis induced by the coronavirus epidemic alone, and that according to IIF’s models, the lira (TRY) remains overvalued, despite its recent deep devaluation.
Turkish nerves have eased a little in the last week after Turkish President Recep Tayyip Erdogan announced a large gas deposit find, but while the new source of energy will be a big boon for the country in the long term, it makes no difference in the short term. With dwindling reserves and Erdogan’s unorthodox fixation on low interest rates Glossop speculates that the central bank will impose capital controls before it
will hike rates, which will only lead to more capital outflows.