Some benefits to capital controls, say EM fund managers
Numerous emerging markets limit foreign involvement in their capital markets, which a number of fund managers say can bring benefits to investors.
Free marketeers typically regard capital market controls in emerging economies as unfair restrictions on free flows. A number of fund managers active in EMs disagree.
Both groups crave access to EMs, which provide 68% of global GDP growth and are widely viewed as an antidote to anaemic Western economies.
Consequently, EMs have faced strong flows into their currencies, harming domestic exporters, and potentially lethal rapid outflows when Western investors become negative on EMs.
China has restricted foreigners’ bond and equities investing, Brazil charges 6% upfront on foreigners investing in local FX and bond markets, and curbs foreign flows to the curve’s short end. In India, foreigners are limited in the buying of foreign bonds and corporates.
DWS Investments’ head of portfolio management for EMs Andreas Römer told clients earlier this year limiting inflows, in bond markets for example, could “provide more stability, by putting a cap on fast money investing in shorter-dated yield only for the FX appreciation. If too much short-term money comes in, it can all get very bumpy in markets.”
Steven O’Hanlon, head of fixed income at boutique ACPI, acknowledges controls typically “do no good”.
O’Hanlon adds that a lot of the markets in Brazil and Russia have been “taken up by ‘hot money’ and there have been massive swings in appetite for them by very bullish, then bearish, investors.
EMs are not big, and if you do not prevent money from overseas rushing in, it causes valuation disruptions. You have already seen far too much money flow into Brazil, Malaysia and Indonesia.”
But he says New Delhi’s controls over foreign investor activity in local bond markets allow India to “run its own monetary policy.
In bond markets, if you have a bad economic situation and all the foreigners are pulling money out at that same time, you can be trying to pull rates down, but they can be going up because of the outflows.
“With closed bond markets like India you can assess your savings rate and you’re not going to wholesale markets. The amount of debt can be calibrated to be at sustainable levels, given the nation’s savings rate. If you cannot pay for the debt you’ve issued, through the savings base, you have a problem if markets stop lending you money.”
ACPI identified Indian fixed income as attractive back in 2007. Its onshore and offshore ACPI India fixed income funds could each bid for debt over five years’ duration in India’s latest auction.