Textbook economics holds that free capital mobility is a source of stability, because it allows international investors to diversify risk and pursue the most profitable investment opportunities.
Yet real world experience suggests the vagaries of international capital flows can impart a huge amount of instability. The prime reason for this is that self-fulfilling expectations can get stuck on an explosive path and, when they do, they have the power to alter the underlying fundamentals. When developed market expected returns were very low due to sluggish growth and easy policy rates, investors flocked towards emerging markets in search of higher returns. This pushed up EM asset prices (including the exchange rate) and led to a huge increase in domestic credit growth in various...
To continue reading this article...
Join Investment Week for free
Signup and gain exclusive members-only insights - all free of charge!
- Unlimited access to real-time news, analysis and opinion from the investment industry, including the Sustainable Hub covering fund news from the ESG space
- Get ahead of regulatory and technological changes affecting fund management
- Important and breaking news stories selected by the editors delivered straight to your inbox each day
- Weekly members-only newsletter with exclusive opinion pieces from leading industry experts
- Be the first to hear about our extensive events schedule and awards programmes
