Weathering the latest decline phase of non-resident capital flows, emerging market currencies and economies have fared remarkably well compared with the previous waves. In fact, from 2011 to 2016, the highest one-month drop among a basket of EM currencies was no greater than that of the euro or Australian dollar.
Economic advisor for Oxford Economics Guillermo Tolosa writes that strong EM flows and currency valuations will likely be sustained and may represent a new long-term wave of capital flows:
“In our view, the lower crash risk, higher variance, higher cross-asset correlations and the correlations within EM currencies are all here to stay. The changes in policy framework will probably be permanent. […]
There is certainly no shortage of potential threats to the EM world. These include pockets of very high corporate debt, the spectre of protectionism and China-related reversals. But lessons from the past lead us, on balance, to be optimistic about the future. […]
For over 40 years, investors from developed markets have systematically piled into EM assets (on a yearly basis, and with varying degrees of intensity), as they rationally try to reduce “home bias” in their portfolios. The current political environment suggests there are few reasons for investors to alter course.”