Investors tiptoe back into emerging markets as storm clouds linger

Wed Mar 30, 2016 4:52am EDT
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By Mike Dolan

LONDON (Reuters) - Emerging markets may well appear cheap again after years of attrition, but there's considerable trepidation about venturing back out to the developing world until the financial and political storms have finally lifted.

Global investors have tiptoed back into emerging assets over the past six weeks at least partly on hopes that the gut-wrenching New Year shakeout may have been a final capitulation after three years of downdrafts and disappointments.

According to the Institute for International Finance, foreigners ploughed some $36.8 billion back into emerging stocks and bonds in March - the highest inflow in nearly two years and well above monthly averages of the past four years.

And yet these are baby steps. To put it in context, that portfolio pop compares with a total net capital outflow from emerging economies in 2015 of some $730 billion.

For the coast to clear, three clouds have to evaporate.

First is a lingering fear of higher U.S. interest rates and dollar appreciation that squeezes hard-currency borrowers in emerging economies, stresses local currencies and forces credit to be far tighter than needed to buoy weakening economies.

The second is China's economic slowdown and its slipstream effect on commodity prices and emerging markets at large.

And third is a spike in political risks in many countries such as Brazil, Turkey and South Africa - pressures magnified by recessions and rising joblessless but which, in turn, compound the economic malaise and policy paralysis on the ground.   Continued...

People ride escalators in the financial district of Pudong in Shanghai, China, March 15, 2016. REUTERS/Aly Song