After several years of riding high on foreign investment cash and commodity revenue, emerging markets are in for a shock.
The shift is under way. Net capital inflows in emerging markets stood at $3.9 trillion between 2009 and 2012. Between 2004 and 2012, net capital flows in emerging markets stood at a staggering $7 trillion, slightly less than half the size of the U.S. economy. The concern is that the quality of these investments has deteriorated over the last few years, since the low-hanging fruit of earlier years is gone, forcing investors to become more adventurous.
The other major development is that China, itself still an emerging economy, has become a major player in investing in emerging markets. It is estimated that as much as 30 percent of capital inflows in emerging markets in 2012 came from China. If the Chinese slowed down their investments now, that would be a big blow to emerging markets.