Emerging markets are making up shortfalls that have resulted from a fall in investment from developed countries
Data from the International Monetary Fund shows emerging markets are increasingly investing in other emerging markets, making up for slowing investment flows from developed economies to emerging markets.
The IMF’s Portfolio Investment data indicates emerging markets cross-border portfolio assets grew by a factor of three between 2001 and 2008 compared with a doubling of flows from advanced economies.
In the same period, flows from emerging markets to other emerging markets, known as South-South flows, have picked up by a factor of six, against an increase of just 2.5 times between emerging and developed markets.
Ousmene Mandeng at Ashmore Group says the asymmetry in allocation behaviour reveals significant differences in views about the international economy, with emerging markets increasingly confident about themselves. South-South investment integration and a shift relative portfolio prices in favour of emerging markets is also likely, Mandeng says.
The data is significant because although anecdotal evidence of direct investment deals done between emerging market principals is strong, there has until now been no accurate measurement of equity and debt portfolio flows.
The portfolio allocation pattern shows total cross-border assets allocated to emerging markets have grown significantly and have been large relative to the most commonly used market benchmark indicators. Investments are driven predominantly by equities but allocation to debt securities has also shown a continued rise, notes Mandeng.
Advanced economies have maintained a substantially higher proportion of their cross-border portfolio investments in other advanced economies. However, investment flows from advanced markets are not all the same. Flows from the US to emerging markets increased from 10% in 2001 to 13% in 2008 but flows from Japan, Germany and France were just 3% in 2008.
Cross-border investment patterns also differ significantly among emerging markets, the IMD data shows. Thailand holds about half of its cross-border portfolio assets in Korea making it one of the most important holders of Korean portfolio assets. Egypt holds 20% of its cross border portfolio assets in Saudi Arabia. In contrast, Argentina and Colombia hold 87% and 74% of their cross-border portfolio assets in the US.
