Asset managers are deploying more money into emerging markets, fuelling risk amid bubbling asset prices.
Investors have boosted the value of higher-yielding assets in emerging markets by 55 per cent to US$1.4 trillion in May compared with October 2007, according to the Bank for International Settlements (BIS).
Views by managers can make or break economies in emerging markets, where assets are smaller.
The development is “a potentially important source of concern”, the bank’s research division said in a report yesterday.
“Any decision by asset managers with large assets under management to change portfolio allocation can have a major effect on emerging market assets that are relatively small.”
Financial markets underwent a period of volatility last month amid “escalating geopolitical tension”, the BIS said, but quickly recovered.
“Volatility fell back to exceptional lows across virtually all asset classes, and risk premia remained compressed. By fostering risk-taking and the search for yield, accommodative monetary policies thus continued to support elevated asset- price valuations and exceptionally subdued volatility,” the BIS said.
The comments from the BIS echo worries from other analysts surrounding the abundance of stimulus by governments worldwide that are fuelling asset prices.
The so-called quantitative easing policy by the US Federal Reserve is expected to end next month and consequently, the Fed may increase interest rates next year. But the policy of the European Central Bank is the reverse, where it is cutting rates and accelerating the flow of liquidity to banks.
Separately, the bank said cross-border claims of BIS reporting banks rose by $580 billion, the first substantial quarterly increase since late 2011.
“Claims on both advanced and emerging market economies grew considerably. At individual country level, claims vis-à-vis borrowers in China increased the most, taking the outstanding stock of cross-border claims on the country above $1tn at the end of March 2014,” the BIS said.
“Claims on the rest of Asia, Latin America and Africa and the Middle East also increased, albeit at a more modest pace. By contrast, claims on emerging Europe fell for a fourth consecutive quarter.”
halsayegh@thenational.ae
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