Published on Monday, June 28, 2021

Global | Emerging market flows look towards the US

The increase in vaccination rates has enabled a gradual reopening of the economy, which, alongside the loosening of repressed demand and excess saving, means that the global economy is on track for a major recovery accompanied by a rise in inflation, which should, theoretically, only be temporary.

Key points

  • Key points:
  • Global portfolio flows over the last few weeks have been redirected away from emerging markets and towards developed ones, with the exception of China. The emerging economies continue battling the pandemic and face idiosyncratic risks, some of them from social unrest.
  • The growing fears of inflation has put central banks in a precarious position, needing to keep interest rates stable, or even raise them, despite the risks that might bring for growth.
  • Fortunately for emerging markets, the acceleration in global growth is a key factor. The Fed has been able to anchor inflationary expectations despite the jump in US Treasury bonds since early June, in turn, strengthening the credibility of its new average inflation targeting strategy.
  • Investors appear to be increasingly confident that the recent rises in inflation are transitory and will not hinder economic recovery. As a result, they seem prepared to be patient and allow emerging markets time to get back on the growth track.

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