Emerging Markets Capital Flows Will Continue
The Central Banks of India and Australia both moved interest rates higher ahead of the U.S. FOMC meeting. India is fighting rising consumer prices while Australia is the direct beneficiary of China's double digit growth. These moves continue to highlight the appeal of the emerging markets for global investment dollars. The Australian dollar is almost trading at parity with the U.S. dollar. India's 10 year government debt versus the U.S 10 year Treasury recently traded to a ten year spread high of 5.67%; the ten year average is 3.17%. According to Bloomberg, $10 billion has flowed into Indian government debt this year and $25 billion into the Indian Bombay Stock Exchange. Australia, which is a direct exporter of raw materials to China, has an unemployment rate less than half of the U.S and the desired inflation target of the U.S. FOMC.
Capital flows are not restricted solely to emerging market government debt and equities. Emerging market corporate debt remains attractive, as well. According to EPFR Global, $39.5 billion has flowed into emerging market debt funds so far this year. Investors are seeking higher yields in investment grade, as well as junk. The gap between emerging market high yield and investment grade is the smallest since June 2008. The spread between U.S. high yield debt and emerging market high yield has been cut in half since early 2009 to near 150 basis points.
Later this week, Bank Indonesia, Bank of England, Bank of Japan, and the European Central Bank all present their decisions on interest rates and further stimulus. It seems that all Central Banks are squarely focused on themselves ahead of the G-20 meeting, clearly not "all for one and one for all." A repeat of the early 2009 globally coordinated efforts this is NOT.
For investors, the recent Central Bank decisions continue to support capital flows and further allocations into the emerging markets. Besides Silicon Valley, the only other place to find sustained growth is the emerging markets.