Capital Flows: Outlook 2019
This article originally featured in Active Capital 2019.
GDP growth is slowing. Interest rates are near record lows. In a late-cycle environment, these factors are driving ever-greater cross-border capital flows, both to diversify risk and chase enhanced returns. We analyse the likely sources and destinations of capital over the coming year.
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Capital Flows: Outlook 2019
Top 10 most likely sources of cross-border capital in 2019
United States, Luxembourg, Germany, Switzerland, Norway, Qatar, United Arab Emirates, Singapore, Taiwan, Japan
Wealth, financial freedom, innovation, tax burden and unemployment contribute to a high likelihood of these countries releasing capital in 2019. Singapore has already invested more than $4 billion into Mainland China, South Korea, the UK and Australia this year. We expect further outbound capital from the Middle East, including Qatar and the UAE. The Qatar Investment Authority has announced it intends to increase US-bound capital in real estate, technology and exchanges by $15 billion. A strong treaty network and EU participation exemptions makes Luxembourg an attractive base for cross-border investment into Europe, although EU tax laws are evolving, which may influence this. In terms of Europe-bound cross-border investment, South Korea will remain key.
The top sources of capital so far in 2019
United States, Canada, France, Germany, Singapore, Mainland China, Hong Kong
These countries house the top 20 global cross-border buyers in the 12 months to Q1 2019. Of almost $1 trillion spent on commercial real estate (CRE) globally in the 12 months to Q1 2019, one third involved cross-border investment. Canada, the US, Mainland China and Singapore were home to the leading cross-border buyers over this period. Equity funds, investment managers and real estate operating companies were among the most active, investing in assets from offices in Madrid, Spain, to shopping centres in Hong Kong. Canadian pension funds were also active, investing in apartments in the UK and US as well as office and industrials, in their mission to liability match obligations. South Korea remained a key source of cross-border capital into Europe.
Private equity: A leading indicator for future capital flows?
France, Italy, Norway, Finland, Singapore, Mainland China, Hong Kong, Japan
PE investment acts as a leading indicator for cross-border capital flows from other sources. Mainland China and Hong Kong absorbed $5 billion of international PE cross-border capital in Q1 2019 and Japan over $1.3 billion into office and retail. Norway and Finland saw $1.7 billion of PE capital, up from $706 million over the full year in 2018. PE invested $510 million in hotels and offices in Italy in Q1 2019, on the back of tourist flows and local economic strength, even as the country hit technical recession and government bond yields spiked amid the 2018 budget stand-off with the EU.