FPI inflows: Emerging markets yet to gain from global liquidity

The worst quarter for foreign outflows in 20 years marks a divergence between foreign investor activity and liquidity in global markets, generally seen fueling the post-crisis inflows into emerging markets. 

An analysis of indices tracking liquidity in major markets shows conditions remain benign. Both the Bloomberg Euro Area Financial Conditions Index and the Bloomberg U.S. Financial Conditions Index have had largely positive values in recent times. A positive value indicates easy availability of capital.  The average value of the Bloomberg Euro Area Financial Conditions Index since June-end is 0.07, based on month-end values. It is 0.43 for the Bloomberg U.S. Financial Conditions Index. 

Tight liquidity has previously coincided with foreign outflows. For example, the EU’s index had an average value of -8.73 in the last quarter of 2008.  It was -8.02 for the US in the same period. This coincided with $3.33 billion in outflows at the time. The indices have largely been in positive territory since then, with global central banks looking to ease liquidity and spur growth. A brief decline in liquidity was seen in 2011 for the EU index, coinciding with intermittent foreign outflows. 

Easy money in developed markets generally acts as a tailwind for EM flows, according to Pankaj Pandey, head of research at ICICI Direct. However, risk-aversion on account of trade wars has contributed to outflows from a number of EMs. 

China has seen outflows of over $12 billion this quarter. Brazil’s outflows were at $4.7 billion. South Korea has seen $1.2 billion in outflows, while Russia has seen inflows of $0.3 billion. 

India, in particular, has been affected by a spike in crude oil prices, following an attack on Saudi Arabian oil facilities on September 14. The rise has affected India’s currency and hit many sectors dependent on crude oil or related products, said Pandey.  

Crude oil prices surged 12.8 per cent from Friday’s close, after the attack, to $68.38 per barrel on Monday. India’s quarterly outflows are likely to be the biggest since 1999, according to Bloomberg. Foreign portfolio investors have been net sellers by $4.7 billion (over Rs 33,000 crore) so far in the September quarter. 

Geopolitical tensions have contributed to the risk aversion, according to U R Bhat, director at Dalton Capital Advisors (India). This includes the conflict between the US and Iran, issues over the exit of Britain from the EU (Brexit), as well as trade tensions. 

He said that the outlook for risk had already been muted, and expectations from foreign flows would be negative if the Saudi Arabia situation fails to show any sign of stability.

“If it escalates, all bets are off,” he said.  News reports that emerged later on Tuesday suggested that Saudi Arabian oil facilities would be back on track sooner than expected. 

Following the reports, crude oil prices corrected by 5.8 per cent to $64.44 per barrel. 

Foreign portfolio investors continued to be net sellers by Rs 959.09 crore in India on Wednesday, showed provisional exchange figures.