Portfolio Composition and Valuation Effects in Emerging Market Economies

The increase in cross-border assets and liabilities of nations with globalization, implies small asset price and currency movements create large wealth changes. The national net external position is increasingly driven by valuation effects, which the current account does not capture. We analyze valuation effects for a group of seven emerging economies, namely Brazil, Colombia, India, Republic of Korea, Mexico, Peru and Turkey for the time period 2005:Q1-2015:Q4 by scrutinizing their external asset portfolio while controlling for country fundamentals. Both asset and liability categories of Direct Investment equity are found to positively impact valuation. Equity liabilities and debt assets of Portfolio Investment positively influence valuation. Debt liabilities of all kinds of investment negatively impact valuation. Countries with stronger currency tend to gain through valuation effects. An appreciated real effective exchange rate is associated with higher valuation gains. We also found non-linear effects of the composition of external debt portfolio by interacting external portfolio and country characteristics. The external portfolio selection of emerging economies (with more in Direct Investment equity liabilities and Portfolio Investment debt assets) in the period has shielded them from global volatility, and enabled valuation gains.