QNB expects more capital flows to head to emerging markets

Qatar National Bank (QNB) said that more optimistic expectations regarding global macroeconomic performance could support increasing capital flows to emerging markets, provided that the Federal Reserve and the European Central Bank continue their monetary easing policies, growth rates in China rise, and local conditions improve in most major emerging markets.

In its weekly report, QNB described the current year as positive for capital flows to emerging markets despite ongoing volatility, citing the global easing cycle led by the Federal Reserve and the European Central Bank, along with Chinas massive economic stimulus measures announced in September. These favorable conditions emerged after several challenging quarters following significant monetary tightening in major advanced economies in 2022.

The report emphasized that a more positive global macroeconomic environment is driving capital toward emerging markets. According to the Institute of International Finance, non-resident portfolio flows to emerging markets, representing foreign investor allocations in local public assets, saw a significant shift from negative to positive territory in late 2023. These inflows resulted in strong returns across various emerging market asset classes after reaching their lowest levels in October 2023, including a 20.2% increase in equities (MSCI Emerging Markets Index) and a 19.6% rise in bonds (JP Morgan Global Emerging Market Bond Index).

QNB attributed its expectations for increased capital flows to emerging markets to three key factors. The first is the continued monetary easing by major central banks. The report noted that changes in interest rates in advanced economies are likely to favor investments in emerging markets as central banks increase their easing cycles in the coming quarters, despite concerns about the global spread of fiscal populism. The Federal Reserve is expected to cut interest rates by 75 basis points next year, while the European Central Bank is projected to reduce rates by 100 basis points in the same period. Lower nominal yields in the U.S. and Europe traditionally drive investors toward higher-risk, higher-return assets, such as those in emerging markets.

The second factor is Chinas economic policies, which include more comprehensive measures to support growth and local asset markets. These actions are expected to provide a consistent tailwind for capital flows into emerging markets over the coming quarters, given that China is the largest component in key emerging market indices such as the MSCI Emerging Markets Index. Following significant fiscal, monetary, and regulatory stimulus, the Chinese government has signaled its willingness to take further action if needed to ensure growth and financial stability. This is anticipated to rejuvenate local Chinese investor activity and attract foreign investors who have under allocated to Chinese equities and fixed-income markets.

The third and final factor is stronger macroeconomic fundamentals in most emerging markets. Many advanced economies have accumulated significant imbalances due to excessive stimulus policies following the pandemic and the Russia-Ukraine conflict, leading to challenges such as rising public debt and inflation instability. In contrast, most emerging markets have implemented conservative fiscal policies, avoiding excessive debt accumulation and external vulnerabilities. This has bolstered their political credibility and increased the attractiveness of their markets. QNB concluded that these factors collectively position emerging markets as increasingly appealing destinations for capital flows, particularly as global monetary policies shift toward easing.