Global capital inflows to major developing economies set to surge

Major developing economies are projected to experience a significant rise in net capital inflows this year, reaching nearly $903 billion, an increase of almost a third. This forecast, however, is heavily dependent on the stability of global growth, as stated in a report by the Institute of International Finance (IIF). The anticipated 32% net increase is mainly attributed to a robust recovery in foreign direct investment (FDI) and an influx of cash into equity portfolios.

Although global growth is expected to be 3.1% this year, which is below the 3.8% average from 2000 to 2019, the IIF report suggests that a global ‘soft landing’ scenario could positively influence capital flows to Emerging Markets (EMs). Additionally, global trade has shown modest recovery signs in recent months, primarily driven by increased trade volumes in EMs. Capital flows are a crucial part of a country’s balance of payments, alongside the current account balance and changes in reserves.

Non-resident capital flows largely comprise foreign direct investment and portfolio investments in stocks and bonds. It is projected that net inflows of FDI will soar to $426 billion in 2024. Simultaneously, net flows into foreigners’ portfolios are expected to rise to $259 billion, up from $161 billion in 2023, as China, which has been a significant source of outflows over the past two years, shows signs of a modest recovery. The IIF’s report covers six economies each from Emerging Europe, Latin America, and Africa/Middle East, and seven from Asia.

In various regions, robust growth and strong macroeconomic fundamentals are expected to fuel a rebound in foreign capital flows to Asia, excluding China. The inclusion of India in JPMorgan’s benchmark local currency bond index, starting next month, is anticipated to attract additional inflows into local currency-denominated government debt, lower bond yields, and provide support for the rupee, according to the IIF report. While FDI outflows from Russia are expected to persist, net flows will likely be positive in Emerging Europe, partly due to increased FDI flows to Hungary.

Fidelity Emerging Markets Limited (LON:FEML) is an investment trust that aims to achieve long-term capital growth from an actively managed portfolio made up primarily of securities and financial instruments providing exposure to emerging markets companies, both listed and unlisted.

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