Capital flows to rebalance from Asia to developed markets this year, analysts say
“The gap between Asian growth and G3 [US, Europe and Japan] growth is declining, so investing in Asia is no longer a no-brainer. It actually is something that requires a lot of brains to decide which country is actually attractive,” said Darius Kowalczyk, senior economist at Credit Agricole.
As US and European growth returns, the global economy needs to maintain its momentum while dealing with liquidity withdrawals under the US Federal Reserve’s tapering efforts, which will result in funds flowing from Asia to the US.
Tapering refers to the Fed’s pre-Christmas decision to begin reversing its financial-crisis-induced US bond buying programme. It was made because of improving US economic indices. Understanding the repercussions of tapering, especially if mishandled, will drive markets over the coming year and beyond.
“The wall of money that the Fed has put into emerging markets because of quantitative easing is receding … and one of the key elements to our outlook this year and overriding a lot of the views we have … is this receding wall of capital,” said Mitul Kotecha, head of global market research for Asia at Credit Agricole.
US unemployment fell to a five-year low of 7 per cent in November, and the Fed predicts it will drop to 6.3 per cent by the end of this year. Analysts at Credit Agricole predict inflation in the US will move above 2 per cent and interest rates will start rising gradually later this year.