Return of foreign investors to buoy EM markets

The rebound in EM financial markets during the past month coincided with an increase in portfolio inflows. Capital Flows Tracker, shows that, having sunk to the lowest levels since the 2013 "taper trantrum" during the summer, net portfolio investment has risen to about $35bn so far in October.

Capital flows are particularly volatile, but there are good reasons to think that portfolio inflows will hold up reasonably well in the coming months. In spite of persistent uncertainty about when the Fed will finally get on with the job of raising interest rates, surely few investors would be taken by complete surprise when the FOMC does finally hike.

"Our view is that the federal funds rate will eventually rise much further than is generally expected is predicated on stronger US economic data, and thus should not be cause for flight to safety. Meanwhile, looser monetary policy seems to be on the way from both the ECB and BoJ, while we suspect that better news from China is just around the corner too. As such, we believe that the return of steady portfolio inflows will support EM markets in 2016/17, with the outlook for equities particularly promising", says Capital Economics in a research note.