@capital flows to bric countries
TRANSCRIPT
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Capital Flows to BRICs Countries
Eduardo Pedreira Collazo
BBVA ResearchDepartment
Capital Flows
Latin American and Caribbean EconomicAssociation
Mexico - November 2nd, 2006
Javier Santiso
Economista Jefe/Director Adjunto
Centro de Desarrollo OCDE
Miguel A. Canela
Facultat de MatemtiquesUniversitat de Barcelona
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IntroductionI
Focus on equity flows and preliminary resultsII
VAR models: impulse response analysisIII
ConclusionsIV
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Introduction
From a practitioners point of view, we consider extremelyimportant to understand or unveil which factors underlycapital flows to emerging markets, in particular equityflows.
Arguments are based on: international factors (global) and
improvement in local emerging market fundamentals andinstitutions (pull)
More recently, excess liquidity and risk aversion.
Evidence regarding global-local factors is far from beingconclusive about their relative importance. Very few evidencefor liquidity or risk aversion.
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Introduction: Global liquidity and low interestrates
The sharp decline in interest rates,and global excess liquidity hasbeen underlying the surge ofprivate portfolio flows in the last
years. Investors' strategies search for yield - deepened thistrend, leading to record inflows in2005 and 2006:1Q.
Global Interest Rates(GDP-PPP weighted)vs.
Stock of Liquidity(billions)
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
Mar-9
5
Mar-9
6
Mar-9
7
Mar-9
8
Mar-9
9
Mar-0
0
Mar-0
1
Mar-0
2
Mar-0
3
Mar-0
4
Mar-0
54000
5000
6000
7000
8000
9000
10000
11000
Interest rate
Liquidity
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Introduction: Investors' risk appetite
Investors' appetite for risk isnot fixed over time. Besidesthat, they shift their portfolioallocation according to theirexpected return andperception of risk.
Any onset of increased investor caution elevates risk premiums and, as aconsequence, lowers asset values and promotes the liquidation of the debt thatsupported higher asset prices. This is the reason that history has not dealt kindlywith the aftermath of protracted periods of low risk premiums. Alan Greenspan
Global Risk Aversion Index Indice - IARG64 assets: emeging (dollars) and developed (local curencyl)-6.0
-5.0
-4.0
-3.0
-2.0
-1.0
0.01.0
2.0
3.0
4.0
jun
-95
ab
r-96
feb
-97
dic
-97
oc
t-98
ago
-99
jun
-00
ab
r-0
1
feb
-02
dic
-02
oc
t-03
ago
-04
jun
-05
ab
r-06
Source: BBVA - Capital Flows.
+ aversion
- aversion
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Introduction: In general, improvedfundamentals
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Introduction: : Compressed EM sovereignspreads
Sound macro fundamentals, highcommodity prices and global
growth, compressed EM spreadsto historical levels, below 200bp.
EMBI+(lhs) vs.USCorporate spread BAA(b.p.)
200
400
600
800
1000
1200
1400
1600
1800
Jan
-95
Jan
-96
Jan
-97
Jan
-98
Jan
-99
Jan
-00
Jan
-01
Jan
-02
Jan
-03
Jan
-04
Jan
-05
Jan
-06
50
60
70
80
90
100
110
120
130
140
150
EMBI BAA-AAA
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IntroductionI
Focus on equity flows and preliminary resultsII
VAR models: impulse response analysisIII
ConclusionsIV
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Focus on equity flows and preliminary results
Many researchers studied FDI, bonds or reserves, butmuch less efforts have been dedicated to explainprivate equity flows.
Many researchers studied FDI, bonds or reserves, but muchless efforts have been dedicated to explain private equity
flows.
We are interested in Private Equity Flows
We use equity flows data from EPFR. Data are collected from
a universe of 12,000 international, emerging markets andUS funds, with more than $5.7 trillions in assets.
Investors are worldwide based and not only in US.
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Focus on equity flows and preliminary results
Correlation: flows, local & global factors
A previous exploratory factor analysis, based on principal components, pointsto a four- factor structure, with DEMBI, DCOMM and MSCIW standing alone,and the other five associated to the remaining factor. This structure accountsfor an 85% of the variance.
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Focus on equity flows and preliminary results
Preliminary regression results
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IntroductionI
Focus on equity flows and preliminary resultsII
VAR models: impulse response analysisIII
ConclusionsIV
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A negative shock in global interest rates is associated with increased cumulative flows in LatinAmerica, whereas for Asia we observe a slight decrease.
VAR: Cumulative impulse responseanalysis
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Even though the results are mixed, the evidence for Asia gives supportfor the expected return chasing hypothesis.
VAR: Cumulative impulse responseanalysis
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Panel C give supports to the hypothesis that capital flows are, in part,momentum driven. In the short-run Latin America could suffer a slightlydecrease, but in the long--run both regions will be benefited.
VAR: Cumulative impulse responseanalysis
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VAR: Cumulative impulse response analysis
The effects of a negative shock in global interest rates in long--runreturns is not clear. Panel D suggests that in the short-run these regionswill experiment a lower cost of capital, but in the log--run these pressureeffects might reverse themselves.
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VAR: Contemporaneous effects
The effects of a negative shock in global interest rates in long--runreturns is not clear. Panel D suggests that in the short--run theseregions will experiment a lower cost of capital, but in the log-run thesepressure effects might reverse themselves.
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IntroductionI
Focus on equity flows and preliminary resultsII
VAR models: impulse response analysisIII
ConclusionsIV
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Conclusions
Even though local factors have been improving during the last
decade, the role of global factors is more important.
That is, equity capital can flow into (or out) of a country forreasons other than local fundamentals.
Risk appetite can have an important role
We found that positive returns shocks are followed byincreased short-term equity capital flows, indicating amomentum effect (Bohn and Tesar 1996).
A negative shock in global interest rates is associated with
increased cumulative flows to Latin America.
A negative shock in global interest rates will temporallyreduce the cost of capital, but in the long-run this effect isreversed.