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New Rules for Hot Money

NEW YORK – Capital flows to emerging-market economies have been on a boom-bust merry-go-round for decades. In the past year, the world has seen another boom, with a tsunami of capital, portfolio equity, and fixed-income investments surging into emerging-market countries perceived as having strong macroeconomic, policy, and financial fundamentals.

Such inflows are driven in part by short-term cyclical factors (interest-rate differentials and a wall of liquidity chasing higher-yielding assets as zero policy rates and more quantitative easing reduce opportunities in the sluggish advanced economies). But longer-term secular factors also play a role. These include emerging markets’ long-term growth differentials relative to advanced economies; investors’ greater willingness to diversify beyond their home markets; and the expectation of long-term nominal and real appreciation of emerging-market currencies.