Capital Flows to BRIC’s Countries

Miguel A. Canela Facultat de Matemàtiques Universitat de Barcelona

Eduardo Pedreira Collazo BBVA Research Department Capital Flows

Javier Santiso Economista Jefe/Director Adjunto Centro de Desarrollo OCDE

Latin American and Caribbean Economic Association Mexico - November 2nd, 2006

I II III IV Introduction Focus on equity flows and preliminary results VAR models: impulse response analysis Conclusions 2 .

Very few evidence for liquidity or risk aversion. excess liquidity and risk aversion.Introduction  From a practitioners point of view.  Arguments are based on: international factors (global) and improvement in local emerging market fundamentals and institutions (pull)  More recently.  Evidence regarding global-local factors is far from being conclusive about their relative importance. we consider extremely important to understand or unveil which factors underly capital flows to emerging markets. 3 . in particular equity flows.

0% 0. and global “excess” liquidity has been underlying the surge of private portfolio flows in the last years.Introduction: Global liquidity and low interest rates Global Interest Rates (GDP-PPP weighted)vs.0% 7000 1.0% 3. Investors' strategies – “search for yield” .0% 4.0% -1.deepened this trend.0% 2. 5. leading to record inflows in 2005 and 2006:1Q. Mar-98 Mar-99 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-95 Mar-96 Mar-97 Mar-05 4 .0% 6000 5000 4000 Stock of Liquidity (billions) Interest rate Liquidity 9000 8000 11000 10000 The sharp decline in interest rates.

This is the reason that history has not dealt kindly with the aftermath of protracted periods of low risk premiums. dic-97 jun-00 dic-02 jun-95 oct-98 feb-02 oct-03 ago-04 feb-97 abr-01 jun-05 4. they shift their portfolio allocation according to their expected return and perception of risk.0 2.0 0.0 .aversion 64 assets: emeging (dollars) and developed (local curencyl) Investors' appetite for risk is not fixed over time. Besides that.0 -3.IARG -6.0 3. as a consequence.0 Source: BBVA .0 + aversion -5.0 -1.” Alan Greenspan ago-99 abr-96 abr-06 5 .0 -4.Capital Flows. lowers asset values and promotes the liquidation of the debt that supported higher asset prices.0 -2.0 1.Introduction: Investors' risk appetite Global Risk Aversion Index Indice . “Any onset of increased investor caution elevates risk premiums and.

improved fundamentals 6 .Introduction: In general.

compressed EM spreads to historical levels. US Corporate spread BAA 1800 1600 1400 1200 1000 800 600 400 200 EMBI BAA-AAA 150 140 130 120 110 100 90 80 70 60 50 Sound macro fundamentals. below 200 bp. high commodity prices and global growth. Jan-03 Jan-04 Jan-05 Jan-98 Jan-99 Jan-00 Jan-01 Jan-95 Jan-96 Jan-97 Jan-02 Jan-06 7 .p.Introduction: : Compressed EM sovereign spreads (b.) EMBI+ (lhs) vs.

I II III IV Introduction Focus on equity flows and preliminary results VAR models: impulse response analysis Conclusions 8 .

with more than $5.  Many researchers studied FDI. but much less efforts have been dedicated to explain private equity flows.  We are interested in Private Equity Flows  We use equity flows data from EPFR. but much less efforts have been dedicated to explain private equity flows. bonds or reserves. emerging markets and US funds. Data are collected from a universe of 12.000 international. bonds or reserves.Focus on equity flows and preliminary results  Many researchers studied FDI.7 trillions in assets.  Investors are worldwide based and not only in US. 9 .

based on principal components.factor structure. This structure accounts for an 85% of the variance. DCOMM and MSCIW standing alone.Focus on equity flows and preliminary results  Correlation: flows. 10 . local & global factors  A previous exploratory factor analysis. points to a four. and the other five associated to the remaining factor. with DEMBI.

Focus on equity flows and preliminary results  Preliminary regression results 11 .

I II III IV Introduction Focus on equity flows and preliminary results VAR models: impulse response analysis Conclusions 12 .

13 . whereas for Asia we observe a slight decrease.VAR: Cumulative impulse response analysis  A negative shock in global interest rates is associated with increased cumulative flows in Latin America.

the evidence for Asia gives support for the expected return “chasing hypothesis”.VAR: Cumulative impulse response analysis  Even though the results are mixed. 14 .

in part. 15 . but in the long--run both regions will be benefited.VAR: Cumulative impulse response analysis  Panel C give supports to the hypothesis that capital flows are. momentum driven. In the short-run Latin America could suffer a slightly decrease.

VAR: Cumulative impulse response analysis  The effects of a negative shock in global interest rates in long--run returns is not clear. Panel D suggests that in the short-run these regions will experiment a lower cost of capital. 16 . but in the log--run these pressure effects might reverse themselves.

Panel D suggests that in the short--run these regions will experiment a lower cost of capital.VAR: Contemporaneous effects  The effects of a negative shock in global interest rates in long--run returns is not clear. 17 . but in the log-run these pressure effects might reverse themselves.

I II III IV Introduction Focus on equity flows and preliminary results VAR models: impulse response analysis Conclusions 18 .

but in the long-run this effect is reversed.Conclusions  Even though local factors have been improving during the last decade. equity capital can flow into (or out) of a country for reasons other than local fundamentals.  A negative shock in global interest rates is associated with increased cumulative flows to Latin America. indicating a momentum effect (Bohn and Tesar 1996). the role of global factors is more important.  A negative shock in global interest rates will temporally reduce the cost of capital. 19 .  Risk appetite can have an important role  We found that positive returns shocks are followed by increased short-term equity capital flows.  That is.

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