Local Influences and Return Chasing: Entering a New Era in Emerging Equity Markets

This paper examines a shift in global equity flows, highlighting that local factors now dominate over global ones in emerging markets, driven by investor sensitivity to local returns post-COVID.

Structural Shifts in Global Financial Flows

The question of whether the global financial cycle still predominantly influences capital flows to emerging markets is explored in this insightful working paper. Utilizing detailed, investor-level data, the authors investigate a notable shift in the drivers of global equity flows over recent years. With the aid of a dynamic factor model, the research dissects these flows into global, or “push,” factors and country-specific, or “pull,” factors. Historically, global elements had a commanding influence; however, the paper reveals that local, country-specific factors have now taken precedence in driving capital allocations, especially in the wake of the COVID-19 pandemic. This recalibration illustrates a renewed investor focus on local excess returns, effectively reconnecting capital flows with domestic price discovery dynamics.

The Rise of Local Factors in Investment Decisions

In the analysis presented, the authors showcase how local projections underscore the evolution of active return chasing. This trend indicates investors’ growing responsiveness to local market conditions and their renewed focus on local excess returns. These findings suggest a marked shift towards a more nuanced understanding of regional markets, where domestic factors now exert more influence on investment decisions than overarching global trends. This local emphasis is particularly pronounced in the post-pandemic landscape, where investors are keen on engaging in markets with robust local price discovery mechanisms.

Collaboration Among Leading Economists

The working paper is a collaborative effort involving Jongrim Ha, a Senior Economist at the ASEAN+3 Macroeconomic Research Office (AMRO); Daisoon Kim, an Assistant Professor at North Carolina State University; and Inhwan So, an Assistant Professor at Hongik University. These experts bring together a wealth of academic and practical expertise, providing a comprehensive examination of capital flow dynamics in emerging markets. Their joint research offers valuable insights into how investor behaviors shift in response to changes in global and local market conditions, shedding light on the intricate balance between global financial cycles and country-specific investment drivers.

Source: Local Factors and Return Chasing: A New Phase in Emerging Equity Markets – ASEAN+3 Macroeconomic Research Office