Risk perception is probably going to remain high for a long period - Natixis

In a write-up by analysts at Natixis titled, 'The key difference today between emerging countries with external surpluses and those with external deficits', the analysts note that risk perception is probably going to remain high for a long period, given protectionism, the Turkish crisis, the sanctions against Iran and Russia, the uncertainty over growth, etc. 

Key Quotes:

"High risk perception systematically leads to capital outflows from emerging countries, which puts those emerging countries that have chronic or significant external deficits in difficulty."

"Economic and financial prospects for emerging countries are therefore now probably going to diverge durably depending on whether they have external deficits or surpluses."

"Risk perception is likely to remain high for a long period Risk perception has risen significantly since the second quarter of 2018 and is likely to remain high for a long period, given:

Rising protectionism; - The Turkish crisis; - The sanctions against Iran and Russia and the ensuing international tensions; - The uncertainty over global growth, in particular the fact that because the unemployment rate is now very low - probably close to the structural unemployment rate - growth can be expected to fall back at best to the level of potential growth.

"High risk perception leads to capital outflows from emerging countries."

"When risk perception becomes high, investors systematically withdraw their capital from emerging countries and return to OECD countries, which are deemed safer."

"Risk perception is going to remain high for a long period; - When risk perception is high, capital flows out of emerging countries. This spells trouble for those emerging countries with chronic and significant external deficits: capital outflows will cause their exchange rates to depreciate, lead to problems financing investments, inflation, higher interest rates and, all in all, a fall in growth. Consider the grouping of Brazil + Turkey + India + South Africa + Indonesia."

"We see that in periods of capital outflows (2008, 2011, 2013 to early 2016, 2018), these countries do experience exchange-rate depreciation, inflation, a rise in interest rates and falls in investment and growth. One should therefore be much more optimistic at present about those emerging countries that have external surpluses (for example: Taiwan, Russia, Thailand, South Korea, the Philippines, Malaysia) than those emerging countries with external deficits (for example: Mexico, Brazil, Argentina, Chile, Turkey, India, South Africa, Indonesia).

"Conclusion: A negative configuration for global growth It is normal for emerging countries to have external deficits, since they have to attract capital due to their lower level of per capita capital than in OECD countries. But if risk perception remains persistently high, capital will withdraw from emerging countries. This: - Places emerging countries with external deficits in difficulty; - Constitutes an inefficient allocation of global savings, insofar as it is negative for growth."