For the first time since 1988 capital flows are leaving emerging markets instead of flowing into them. After decades of investing in emerging markets, many investors are deciding to shift their investments into more stable entities. Over the last three decades capital flew into emerging markets worldwide. As emerging economies strengthened and their GDP’s increased, investors began to have more confidence in emerging markets and capital continued to pour into them. As the United States and Europe suffered financial crises in the late 2000’s many emerging markets seems unaffected and continued to thrive. Attitudes have began to shift over the past two years. As economic indicators begin to turn downwards, it leads many to believe that the rapid growth most emerging markets experienced was temporary.
Brazil is an excellent example. Not long ago, the country’s annual growth rate was 7 percent. Many anticipated it would experience similar numbers for years to come, but we see that this rapid growth was short lived; in 2014 it was at a mere 0.1%. We now realize that most emerging countries are not as stable as we thought they were a few years ago. The high number of unknowns is a big variable in the uncertainty associated with emerging markets. Recent changes such as lower commodity prices, the rising dollar, and China’s economic slowdown were all unexpected and largely impact emerging markets. Their unpredictability leaves investors unsure and looking for alternatives.
As investors take their money out of emerging markets many have decided to put their capital into investments with fewer unknowns and that demonstrates long term stability. Some may choose to follow China’s lead, and decide to return to investing in gold which has long term intrinsic value and is resilient against unknown variables. As long as many global economic factors continue to remain uncertain, the trend of capital flowing out of emerging markets is likely to continue.
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