Net portfolio inflows into many emerging markets reached multiyear NET PORTFOLIO highs toward the end of 2020, which allowed a handful of central banks to lean against the wind and accumulate foreign exchange reserves. That said, early data suggest that net portfolio inflows have slowed considerably so far this year. To recap, many emerging markets suffered large net capital outflows at the height of the crisis last year, causing currencies to fall sharply and forcing central banks to intervene. But most EMs weathered the external shock without a crisis. And, particularly since the positive news on vaccine efficacy last year, net inflows have since rebounded. Analysts expect appetite for emerging market assets to continue over the year, which will support capital flows to these countries.

IS DE-DOLLARIZATION FINALLY STARTING?

Locals are so up to their necks on FX in banks and under their beds that when they finally start buying the move could be powerful. Two reasons why locals dollarized: a) Structural – many secular Turks and many others just lost faith in the Turkey country story under Erdogan. Think the trend there has been evident from 2011 – dovetails with more unorthodox policies, concentration of power in executive presidency, concerns around governance/human rights/ rule of law/democracy. Deterioration accelerated after the failed 2016 coup. b) Tactical/trading – simply a question of real rates offered on lira deposits versus dollars. It’s going to be slow to reverse a), and on b) I don’t sense that rates are high enough yet to compensate for expectations on inflation. Now CBRT Governor Agbal needs to rebuild F► reserves quickly – they are improving/building but the question is, without rapid de-dollarization is it happening fast enough. It does not feel that way, so he might feel the need to hike policy rates again to enable him to be able to step in with FX auctions to replenish FX reserves.

-Tim Ash, strategist, Bluebay, February 11

NEW VARIANTS OF RISK

Dispersion in emerging markets asset performance appears to have increased in early 2021, although returns over the medium term have been closely tied to risk premia and asset betas. Higher inflation and improving growth is making central banks take note, although there is wide dispersion across emerging markets on policy normalization. While AstraZeneca is working on a variant vaccine, which might be available for use by autumn, the possible spread of variants coupled with possible vaccine failures adds to risks of near-term setbacks to the global recovery. This may be especially material for countries whose economies rely on domestic demand (especially for services), travel or tourism and that get unlucky with the unpredictable spread of new virus mutations

-Andreas Kolbe, strategist, Barclays, February 11