Daily Economic Briefing: The dog that didn‘t stock

Research evidence excerpt

Daily Economic Briefing: The dog that didn‘t stock

f the Iran War. In most quarters, the levelMost EMs are on course to release 2Q26 BOP over the next

of inflows has surpassed the funding need. Consequently, themonth or so. However, we prefer to turn to slightly lagged

EM private sector has been recycling out excess inflows intoIMF BOP data to understand underlying trends due to the

their own outward investment flows. This explains why for-detail and comparability available across countries. We use

eign inflows and local outflows have been moving in lock-snapshots of 1Q22-1Q26 to discuss more recent trends and

step. The rise of local EM investments is a structural trendalso to set aside the noisy pandemic years.

that is happening against the backdrop of deepening local

capital markets and diversified client bases in certain EMAs a starting point, EM current accounts have moved close to

countries, especially in Asia and Latam. The behavior of cur-balance from 4Q23 onwards. Smaller current accounts

rent accounts and locals explained why steady inflows to EMreduced overall funding needs for EM ex. China (as a whole),

has not translated into a level shift for net flows: i) currentlowering the overall level of net capital flows required with-

accounts are smaller, reducing financing needs and ii) localsout dipping into reserves or hitting domestic currencies.

have more capacity to recycle out flows.

Local investment abroad has been gaining traction across the

three main categories of capital flows: FDI, portfolio and oth-

er flows, though the main change has been the rise of portfo-

lio debt and equity purchases by locals. Local portfolio inves-

tors have been active in foreign equities (mainly in DM). In

recent years, likely due to the behavior of the DM stock mar-