• In this morning’s cut-out of our core strategy document – The Nigeria Strategy Report, we review developments pertaining to the direction of FPI flows across emerging and frontier markets. In addition to delineating the drivers of portfolio flows over 2018, this section presents our outlook on drivers of FPI flows for 2019.

• In our H2 2018 NSR, we noted that the confluence of sturdy DM growth picture and currencies, interest rate normalization in US, and ripple effect of escalating trade wars between US and China should temper the scale of portfolio flows into EMs, idiosyncratic factors and monetary tightening across various EM economies would limit the scale of repatriation. In line with our expectation, after episodes of capital flights that saw dearth of hot money in emerging market (EM) in second quarter of 2018 with net outflow of $26.3 billion, fortunes changed slightly in second half of 2018 as net portfolio flows to EM turned positive ($50.2 billion) following selective play across EMs, shaped by fundamentals rather than general contagion.

• Going into 2019, although the recent spate of selloff across EMs provides entry opportunity and attractive valuations for investors, the litany of potential risks globally from rising U.S. interest rates and increased volatility in equity markets due to escalating trade tensions, political unrest and risk to commodity prices now spurs the need for differentiation and idiosyncrasy in EMs allocation. In sync with our projection for lesser havoc to EM flows in 2019, the Institute of International Finance (IIF) now projects a slight uptick in portfolio flows to EMs  (+11% YoY to $340 billion) in 2019, which will be driven by portfolio flows to equity (+89% YoY to $121 billion),  while portfolio flows to debt (-10% YoY to $222 billion) is expected to remain subdued on declining debt issuance in most EMs.

Figure: Net foreign portfolio flows to EMs

Source: IIF, ARM Research