Rosier prospects of growth in America could spell trouble for investments in emerging markets as investors choose to put their money into more robust economies, The Wall Street Journal reported on Thursday (April 8).
“February and March saw the biggest net outflows from emerging-market bonds since the pandemic emerged last spring, with investors withdrawing about $3 billion each month, according to data from the Institute of International Finance,” the Journal writes. “The selloff was heaviest for debt issued by South Africa, Indonesia and India. Fund managers also pulled out a combined $670 million from stocks in developing countries over those two months.”
These markets — as well as places like Brazil and Mexico — have been upended by an improved growth outlook in America, which has led to a stronger dollar and higher treasury yields. Money managers are counting on the Federal Reserve to raise interest rates and control inflation in the coming years.
As PYMNTS reported last week, the U.S. could play a key role in the projected 6 percent growth in the world economy this year. Some of the factors contributing to this growth include the COVID-19 vaccine rollout, the government’s $1.9 trillion aid package and the fact that American households have built up almost that much money in savings over the past year.
If the U.S. were to take on a larger role, it would be the first time in more than 15 years that America has made a larger contribution to global growth than China. This optimism is pulling capital from emerging markets, noted the Journal report, forcing some developing nations to hike their interest rates despite weaker economies.
“The global liquidity cycle is beginning to turn,” Paul O’Connor, head of a multi-asset team at Janus Henderson, told the Journal. “If you look at emerging-market fixed income today, it’s going against big headwinds.”
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