How Developed Market Investors are investing in Emerging Markets – perspectives from the IMF

The IMF’s recent report on financial stability makes a few interesting points about the evolution and concentration patterns of equity investments into Emerging Markets (EMs). In its recent paper titled “Curbing Excess while Promoting Growth”, it studies investment flows from advanced to emerging economies and leaves us with some food for thought from an IR standpoint.

First, the study quantifies a number of investment trends going back over a decade. It notes that global EM equity portfolio allocations increased substantially from 7% in 2001 to almost 20% in 2012. Fixed-income allocations followed suit, from 4% to 10% respectively. The data are in line with other similar studies, underlining the increasingly global focus of many investment portfolios as domestic biases, broadly speaking, steadily decline.

 Second, the study examines patterns relating to geographical concentrations of global EM portfolios. Out of the $2.4tr of equity assets under management in EMs in 2012, roughly 80% was invested in only 12 of the 190 emerging market economies, with China accounting for a large share of this.

 Third, and perhaps most striking, is the concentration of investors amongst the advanced economies. In 2012 over half of all equity portfolio investment in major emerging market economies came from the US, the UK, Singapore and Hong Kong, with the US alone accounting for about a third.

 The study goes on to suggest that given this degree of concentration, the possibility of tighter monetary policies in the US and UK could have a considerable impact on flows into the largest EMs, as well as on the synchronisation of asset price movements and volatilities.

 A few thoughts for Investor Relations teams in Emerging Markets

 These dynamics could be consequential for EM IR teams planning an investor outreach strategy in 2015. A few additional questions may be helpful to consider:

  •  What key external factors are influencing the decisions of my top foreign shareholders? Which of those factors have the strongest influence on my share price? How can I stay ahead of this issue?
  •  Have I compared my shareholder base with that of my country, region or peer group and analysed how it has changed over the last two years? Have I identified key targeting opportunities?
  •  How correlated is my share price and volatility to that of other main market indices?

Equity Allocations of Advanced Economies to EM Economies by Source Advanced Economy, 2012 (Billions of U.S. Dollars)

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Equity Allocations of Advanced Economies to Emerging Market Economies by Source Advanced Economy, 2012 (Billions of U.S. dollars)

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Equity Allocations of Advanced Economies to Emerging Market Economies by Receiving Emerging Market Economy, 2012 (Billions of U.S. dollars) 

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Source: IMF, Global Financial Stability Report, October 2014