LONDON, May 16 (Reuters) – Foreign direct investment to emerging markets has fallen to its lowest in 20 years, with little prospect of improvement as the U.S.-China trade war rages, according to the Institute of International Finance.
“The reduction in the FDI (foreign direct investment) flows shows a trend of less globalisation,” Robin Brooks, chief economist at the IIF, told Reuters.
“It is a long-running trend, there was a big move to globalise manufacturing production and in the early 2000s that came to an end, and now it has run its course. So there is less greenfield investment.”
Escalating tensions between the United States and China have sucked out capital from emerging markets in recent weeks, while several big banks have scaled back their exposure on various assets.
The IIF’s assessment was based on quarterly data, with the last data point from the end of 2018, said Brooks.
“It is natural to expect that here will be spillover from the trade tensions to FDI — that is still in the pipeline,” he said.
The IIF’s measure of “true” FDI, which strips out reinvested earnings, has fallen to its lowest level in 20 years, including emerging and frontier markets, it said in the report.
Relative to the size of their economies, resource-rich countries like Brazil, Chile and Colombia are the biggest recipients of such FDI, it said, while China gets very little.
“One reason that emerging market currencies have struggled, despite the remarkable dovish Fed (U.S. Federal Reserve) shift, is that low G-3 interest rates pushed a “Wall of Money” to EM (emerging markets) over the last decade, so that there is now a positioning overhang,” the report said.
Editing by Catherine Evans