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Emerging Nations Continue To See Huge Capital Outflows

FORECASTS & TRENDS E-LETTER
by Gary D. Halbert

April 12, 2016

IN THIS ISSUE:

1. Huge Capital Outflows From Emerging Nations Continue

2. Sovereign Wealth Funds Cut Allocations to Emerging Nations

3. “HANDING DOWN YOUR LEGACY” – A Special Gift For You

Huge Capital Outflows From Emerging Nations Continue

If you are wondering why the global economy struggled last year and so far this year, one only has to look at the trend in capital flows of emerging nations. After decades of positive capital inflows to most emerging economies, that trend has reversed sharply in the last few years.

Net capital outflows from emerging markets (EM) weren’t just bigger than expected last year, there’s more pain to come this year, according to the Institute of International Finance (IIF) which monitors such data.

Emerging markets faced a whopping net $735 billion in net capital outflows in 2015, the IIF, a global financial industry association, reported earlier this year. In October of last year, the IIF had projected $540 billion in net outflows in 2015, the first significant net negative figure since 1988. But in the end, the total outflow was almost $200 billion higher.

Capital Flows

This year isn’t likely to be much better, IIF said, forecasting total net capital outflows of almost $500 billion for 2016. The finger is pointed squarely at China, which had larger outflows last year than all the emerging nations combined.

“While most emerging markets have been under pressure, the dominant driver behind this sea-change in emerging market capital flows has been flows to China,” the IIF said, citing “retrenchment” of $110 billion of non-resident capital.

“The 2015 outflows largely reflected efforts by Chinese corporates to reduce dollar exposure after years of heavy dollar borrowing, as expectations of persistent renminbi appreciation were replaced by rising concerns about a weakening currency,” it said.

“China also experienced rising resident capital outflows, as domestic investors sought to move money overseas, and so did other major emerging markets, including Korea, Russia, and South Africa,” IIF said.

Emerging market assets have certainly been unloved by investors: about $74 billion flowed out of global emerging market equity mutual funds in 2015, almost triple the $25 billion in outflows in 2014, according to data from JPMorgan. Asian emerging markets bore the brunt of the exit, with $39 billion flowing out of Asia equity funds (not including Japan) last year, the data showed.

That left emerging market assets trading at low valuations, the IIF said, but it noted that it isn’t clear if that’s “dirt cheap” or a “new normal.”

“EM corporate spreads are at their widest since 2009, while EM equities are trading at a 30% discount to developed markets on a forward price-to-earnings basis, and at a remarkable 65% discount on a cyclically-adjusted basis,” the IIF said.

“Although we expect 2016 to be another year of moderate EM growth—with continued risks from China and commodities prices—some recovery in EM flows and asset prices is possible if downside risks ease and investors start to price in better prospects for 2017. However, poor fundamentals will subject markets to continued high volatility,” it said.

Sovereign Wealth Funds Cut Allocations to Emerging Nations

The IIF noted another risk to flows into emerging market assets: sovereign wealth funds (SWFs).

“The sharp drop in oil prices since mid-2014 has prompted many sovereign wealth funds (SWFs) to adjust their portfolio investment strategies,” the IIF noted, estimating that SWFs increased their emerging market exposure by only around $30 billion in 2015, the smallest amount since 2010.

Overall, SWFs’ assets under management contracted for the first time in more than a decade, falling by over $30 billion to $7.2 trillion last year, the IIF said, noting the decline was particularly pronounced in oil-dependent Saudi Arabia, Norway and Russia.

“Our estimates show that SWFs funded by commodity export revenues reduced the size of their emerging market portfolios by over 8 percent in 2015 to $556 billion— although this was partly offset by the non-commodity funded SWFs, which increased their emerging market exposures by around $77 billion in 2015,” it said.

The bottom line is that capital outflows from emerging market economies substantially accelerated last year. While the IIF estimates that outflows will be smaller this year at around $500 billion, this trend will continue to strain EM economies. That, in turn, will limit our economic growth here in the US, especially in the export sector.

“HANDING DOWN YOUR LEGACY” – A Special Gift For You

Income tax time is less than a week away with the deadline extended to next Monday. That means you have probably gathered all of your financial and investment information to prepare your tax return or give to your accounting professional.

So what better thing to do than organize all of that key information in one handy digital place that makes it easy to update and make changes as needed. The solution: “Handing Down Your Legacy,” our free E-booklet that allows you to keep all of your important financial and contact information in one safe and secure (password protected) file.

Not only will you have all of your financial information in one digital place, Handing Down Your Legacy also allows you to document your final wishes for loved ones to follow upon your death. No one likes to talk about death but the more information you can give your loved ones in advance, the better. Handing Down Your Legacy allows you to store all of your financial information and your final wishes in one secure place.

And best of all, it is absolutely free and there is no obligation on your part. So do yourself a favor and download Handing Down Your Legacy today and complete it as soon as possible. Also, feel free to forward this E-Letter to your family and friends who would also benefit from this useful resource.

Most Survivors Are Unprepared

Obviously, there’s the grief that comes with the loss of a loved one. If that weren’t enough, I once read that over 90% of survivors are not fully prepared to deal with the financial and other issues that come up after the death of a loved one. I certainly believe it based on my own experience in the financial services business. It’s not uncommon for loved ones to contact us without a clue about where to even get started handling the issues related to the remaining estate.

Think about all the assets, investments, insurance policies, liabilities, etc. that you have and all the details related to them. Sometimes it’s challenging for us to keep up with just our own finances. Now imagine someone else, who is already dealing with your loss, trying to come in and figure it out without the benefit of your assistance. Think of the time and research that would take, and of the things that might slip through the cracks.

In many cases, one spouse is the financial partner, in charge of the checkbook, investments and most importantly, filing of important papers. The other spouse may only be minimally involved, signing on the dotted line when necessary and generally knowing where important records are, but not familiar with the details. It can be overwhelming and important things can get missed.

According to CNN Money, there is almost $60 billion in unclaimed assets in the US. Some of it is property that went unclaimed after the owner’s death simply because the heirs were unaware that the assets even existed. After a period of time, unclaimed assets are simply turned over to the state. We have actually had to do this in the past.

There’s no wonder why many survivors struggle to figure out what their loved one’s financial situation is, because they are having a hard time finding all of the paperwork, much less sorting it out. An article I read a couple of years ago estimated that as much as 25% of life insurance benefits are not paid to beneficiaries because they didn’t know a policy existed. How sad!

Getting Your Affairs in Order

Taking the time to document the financial details that pertain to you will save your family hours of searching, on top of the emotional strains they will be dealing with. We all know that when we’re under emotional stress, we don’t always make the best decisions.

The first step may sound too simplistic, but it is to gather your financial information into one safe place. It is amazing to me how many different places financial information is kept in many families. Some have part of their information at their office, other parts at home, some in a file cabinet, some in a dresser drawer, some in all of the above, or other places that might be easily overlooked.

There are times when survivors find important documents only by accident, and sometimes long after the death. It’s also important to remove information on accounts, assets, insurance policies, etc. that are no longer owned. This can save your loved ones from going on a wild goose chase searching for an asset that no longer exists.

Write It All Down - Electronically

Store documents on removeable driveOnce you have all of your information in order and organized where they can find it, you should document all of this in a concise manner. This documentation will serve as a guidepost for your survivors to let them know what assets you have, where they are located and how they should be treated. It is not enough to just tell them and hope they remember. Keep in mind they’ll also be dealing with the grief of your loss.

There are various methods of documenting everything your survivors will need to know. Some write a letter to the surviving partner detailing where all of the important papers are and how they should be handled. However, it is sometimes hard to think of everything to put into the letter, and a letter that covers everything may be so long that it’s overwhelming. Plus, it needs to be updated regularly.

Others keep a summary file folder with their important papers that contains copies of statements for assets, special instructions, important contacts, etc. The summary file approach is usually easier to update than rewriting an entire letter to address changes.

I don’t recommend either of these approaches. I have always favored a more detailed approach for keeping track of your assets and leaving instructions for your loved ones when you are gone. Fortunately, you can now document all of this information electronically, in a single easy-to-update place. Think how much easier this will make it for your loved ones.

A Free Gift for My Readers

A few years ago, we developed this useful and thoughtful financial tool to help organize all of the important items necessary to pass on to loved ones in case of your death. It’s an electronic booklet entitled Handing Down Your Legacy, and I’m once again making it available to my readers and their family and friends free of charge.

Handing Down Your Legacy allows you to store all your important financial information in one place. We tried to think of everything that would be important for your loved ones to know. You simply enter the information, and make sure to update it as things change or if it becomes outdated. The electronic format is superior to a paper booklet or letter, in that it allows you to simply enter information into a template and change it as often as needed.

We are making this available in both a writeable PDF file and a Microsoft Word file, so you can select the best format to fit your needs. Both are easy to complete, but the Word file gives you the flexibility to add more details or include other information that may not be listed in the PDF format. You can customize it as you see fit.

To obtain your FREE copy of Handing Down Your Legacy, give us a call at 800-348-3601 or complete our online request form. There is absolutely no charge or obligation involved. Making this e-booklet available to you is a way for me to show my appreciation to all of those who regularly read this E-Letter. You can also forward this E-Letter to family and friends that you think might benefit from it.

Once you successfully download the E-booklet, I encourage you to complete it soon, and then let your spouse or other loved ones know where it will be saved on your computer or on a memory stick. Be sure you give them the password.

It’s also important to make a backup copy in case of a computer malfunction, and you may even want to print out a copy and keep it in a safe or file for easy reference. Just remember that this document will contain some of your most sensitive information, so use secure passwords and if you print a copy, keep it in a safe place.

It is also important that you review the information in your Handing Down Your Legacy booklet at least annually to make sure all information is current. Outdated records can be just as confusing as no records at all. The Microsoft Word and PDF formats make changing the information quick and easy, so keeping records updated isn’t a chore.

Do It Today, Don’t Procrastinate – Your Loved Ones Will Thank You

I can’t think of anyone reading this who would not be greatly helped by Handing Down Your Legacy. So I strongly encourage you to take advantage of this FREE digital resource. Call us today at 800-348-3601 or complete our online request form.

Then input your financial information (and final wishes, if you choose) as soon as possible. When you do, you will feel a sense of great accomplishment – I promise!

Wishing you well,

Gary D. Halbert

 


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Forecasts & Trends E-Letter is published by ProFutures, Inc. Gary D. Halbert is the president and CEO of ProFutures, Inc. and is the editor of this publication. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of Gary D. Halbert (or another named author) and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Readers are urged to check with their investment counselors before making any investment decisions. This electronic newsletter does not constitute an offer of sale of any securities. Gary D. Halbert, ProFutures, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Past results are not necessarily indicative of future results. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.

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