Standard Life Investments

Weekly Economic Briefing

Global Overview

Going with the flow

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Monitoring cross-border stocks and flows of assets and liabilities, as well as their composition, is a critical aspect of understanding global financial vulnerabilities. In a world of imperfect cross-border financial regulation, large and growing foreign exposures can increase risks and the international transmission of shocks, especially if concentrated in asset classes that are highly cyclical and subject to rapid changes in sentiment.

The best measure of these cross-border positions comes from the IMF’s coordinated portfolio and direct investment surveys, though even in this data countries’ asset and liability positions are not fully aligned. Nevertheless, a survey of these data provides useful insights into recent trends and underlying vulnerabilities. For example, as of the last quarter of 2016, the last available observation, cross-border portfolio investment assets and cross-border direct investment assets had reached historic highs of 73% (see Chart 1) and 42.5% of global GDP (measured in US dollars at market exchange rates) respectively. Partial data from the IIF imply that these stocks will have risen further in 2017. In this sense, cross-border exposures and hence sensitivities are greater than they have ever been. However, this is far from the full story. Since the end of 2010, cross-border investment in portfolio equity has increased from 25% to 34.4% of global GDP, whereas investment in debt securities has declined from 40.1% to 38.6% of GDP, and direct investment assets have risen from 36.8% to 42.5% of GDP. With the stock of cross-border assets at a historic high and the share of portfolio equity assets within that stock also at a high, vulnerabilities stemming from international exposures would appear to be elevated. That said, flows themselves have decelerated on average since the financial crisis. Whereas the annual flow of global investment into portfolio investments averaged 5.3% of global GDP from 2002 to 2007, it has averaged just 1.1% of GDP since 2010, with both equity and debt security flows lower compared with the pre-crisis average. Direct investment flows have been similarly weak. This is the corollary of a smaller dispersion in current account balances compared with pre-crisis peaks and may suggest greater caution on the part of international investors.

Bigger stock but smaller flow