IIF Says Equity to Rule Emerging Markets

On the rise for the past year, equity investment into emerging markets is expected to increase even further this year, perhaps topping out at a substantial $200 billion, according to the Institute of International Finance (IIF).

More than four-fifths of this year’s total private capital flows is projected to come in the form of equity investment, the IIF said in its latest report on capital flows to emerging market economies. Over $130 billion of that is likely to be in the form of direct equity.

Portfolio equity investment is also projected to increase to over $42 billion this year – a significant rise from the $21 billion recorded in 1999.

The influx of equity investment into emerging markets reflects the trend that many analysts have recently cited. After a prolonged dormant period, emerging market companies, have been making increased use of international equity issues as a means of raising cash. The tech boom has also played a major role in the pick-up of both equity issuance from, and capital investment in, the emerging markets.

“The year 2000 starts with a rising net volume of private capital flowing to the leading emerging market countries,” said John Bond, chairman of the IIF’s board of directors. “The levels of new bond issues, the prospects for new portfolio equity investments and for direct equity investments are healthy. The markets are recovering from the crises of recent years, although the volume of private capital flows remains below levels conducive to sustained robust growth.”

Of all the emerging markets, Latin America is most likely to benefit from the flow of equity investment. An indicator of this trend can be seen by looking at 1999 figures in which portfolio equity inflows to the region are shown to have strengthened significantly. For example, portfolio equity inflows to Mexico reached $3.8 billion, following an outflow of $700 million in 1998, while portfolio equity flows to Brazil reached $2.6 billion, compared with $2 billion in 1998.

“With investor confidence buoyant and a strong further pick-up in economic activity expected, portfolio equity investment in Latin America might reach over $11 billion this year,” the IIF said.

Far East to Play Major Role

Equity investment flows to Asia also rose in 1999, topping out at $19 billion with future projections hitting the $24 billion mark. Countries such as Malaysia and South Korea received the largest chunks of equity funds into Asia. This year, China is also expected to be of interest to equity investors, the IIF said, as a number of Chinese companies there have upcoming plans to list overseas.

Of course, the fate of the Asian market rests, in large part, upon the recently-unstable performance of the U.S. equity index, and the performance of other stock markets around the world.

“If past relationships are any guide to the future, a major correction in U.S. equity markets is likely to have sustained adverse effects on emerging markets equity prices,” the IIF said.

Despite a generally favorable international economic environment for recovery in emerging markets, including higher growth this year in industrial Europe, caution is warranted, said Charles Dallara, the IIF’s managing director. In the U.S. specifically, rising interest rates, a sharp increase in the current account deficit and the rapid expansion of consumer demand, spurred by a rise in equity prices, pose the risk of a hard landing for emerging markets, Dallara said.

Still, prospects for overall improvement in the emerging markets are good, the IIF said. Bond issuance should also pick up and net official capital flows from organizations such as the Interntional Monetary Fund are projected to fall to about zero this year, a significant drop from last year’s $5 billion and the nearly $50 billion generated in 1998.

The overall upturn in both private capital flows and economic growth make this a good time for both the private and the public sectors to redouble their efforts toward a closer dialog to strengthen the resiliency of the international financial system, the organization said.