The CrossBorder Capital Blog

Follow The Money – The Change in Direction of World Capital Flows Favours Emerging Markets in 2020     The World is spinning like clockwork. As Central Banks started to ease substantially last year in 2019, so investors’ risk aversion bottomed out, and now, true to form, World capital flows are reshuffling and heading towards riskier climes. It’s a classic liquidity-driven cycle that will inevitably end badly, but for now enjoy the music. History shows that the deteriorating bond and forex markets usually call time on the equity party. So far, things seem OK.    

Action Needed: Rising Yield Pressures   The Global Liquidity backdrop has changed radically. The US Fed has delivered its biggest ever 12-month boost to markets. The strong rally in risk asset prices comes with a warning that liquidity-driven surges often end suddenly. The bogey tends to be rising bond yields. We argue that the US economy looks set to accelerate and US Treasury yields could test 3% later this year.    

A Classic Liquidity-Driven Market   This is a ‘classic’ liquidity-driven market, as 2019 showed. Central Bank quantitative-easing, led by the US, and set against a relatively low exposure to safe assets proved to be the two things that really mattered. Looking into 2020, it may be a year of two distinct halves. Central Banks should continue to ease, at least, for some months more, while, according to our latest data, investors still remain too conservatively positioned in safe assets. Equities, particularly cyclicals, could do well again, and the rally looks set to broaden out beyond the US and other major markets.