Domestic Capital is Fleeing Emerging Markets

Plutocratic elites in emerging markets often “hedge” their bets by funneling financial assets out of their home countries into “safe havens” such as Switzerland and the United States. Maintaining bank accounts and second homes offshore and educating their children in foreign schools provides an insurance policy to protect against eventual political and economic turmoil at home.

In recent years this “keeping-one-foot-out-the-door” mentality seems to have spread dramatically since the great financial crisis. Slowing global growth and high risk-aversion have contributed to the strengthening of the U.S. dollar and the rise of dollar-denominated assets. This period has seen the rise of several very large new contributors, namely China, Turkey and Brazil, to the migration of wealth to safe-havens..

Not one of these countries played a big role in flight capital in the past. Rich Brazilians, for example, historically have had a preference for high-yielding domestic bonds and local real estate, unlike their fleet-footed Argentine neighbors who for decades have taken their assets offshore. But today, these countries are the primary drivers of capital migration. If you add the South Africans, who have been systematically moving both their assets and brain-power out of the country for decades, all of the BRICS (Brazil, Russia, India, China and South Africa), the supposed engines of emerging markets, are seeing persistent capital flight. India is possibly an exception, only because wealth creation is still greater than the funds leaving the country.

The anecdotal evidence on this is overwhelming. Chinese buyers are reported to have spent around $200 billion on foreign real estate in 2018 ($32 billion in Australia alone) and are the major drivers of real estate markets in popular destinations such as Sydney and Vancouver. Russian are known to favor Dubai, Cypress and London; and Brazilians love South Florida, Lisbon and New York. Realtor transaction data point to one-third of total real estate transactions in Lisbon and Vancouver being transacted by Brazilians and Chinese buyers, respectively.

Afrasia Bank’s “Global Wealth Migration Review 2019”( Link ) a compilation of data on the transaction flow of wealthy individuals around the world, provides some color on recent trends in capital flight. The report estimates that in 2018 108,000 High Net Worth Individuals (HNWI) with net assets above $1 million emigrated from their home countries, mainly emerging markets.

The map below, prepared by VisualCapitalist.com, graphically shows the origin and destination of migrant flight capital using Afrasia’s data.

More detailed data on the origin and destination of flows is shown below. A few destinations are highly preferred as safe-havens, with Australia, the U.S., Canada, Switzerland and the U.A.E. receiving most migrant flows. In the case of Australia, the inflows are enough to have a material impact on the total stock of HNWI. Though China and India are seeing significant outflows they also continue to generate many new HNWI. That is not the case in Brazil, Russia and Turkey where the outflows are resulting in a net decrease in the HNWI population. The situation is particularly dire in Russia and Turkey where outflows represent a large part of the home HNWI population and have been persistent in recent years. Other countries cited by the report as important sources of HNWI migrants are Venezuela, Nigeria and Egypt. In the case of Venezuela, HNWI’s have practically abandoned the country, resettling mainly in Spain and South Florida.

Though Afrasia’s data may be a good indication of trends, it probably understates the volume of migrants. This can be seen by looking in more detail at one segment: Brazilians in Florida.

The Case of Brazilians in South Florida

Every country’s HNWI migrants have distinct geographical preferences. As mentioned above, Brazilians have a strong affinity for South Florida. Realtor data for the Florida market indicates that the Afrasia Bank report significantly understates flight capital from Brazil.

A report from the National Association of Realtors on international real estate activity in Florida in 2018  (Link)  cites Brazilians as the most active foreign buyers in Florida in 2018. According to the report, Brazilians accounted for 17% of all real estate transaction in Miami-Dade County, equivalent to 2,400 residences for a disbursement of $1.5 billion.

Moreover, Brazilians are active buyers in other Florida markets, specifically Fort Lauderdale, Palm Beach and Orlando. According to the NAR report, Brazilians bought 2,280 homes outside of Miami-Dade County in 2018. This brings the total of Florida homes purchases by Brazilians last year to 4,680. Total disbursements in the Florida market in 2018 are estimated at $2.87 billion.

The chart below shows the persistent rise of Brazilian buyers in Florida since the great financial crisis. Over this period, Brazilian are estimated to have spent between $18-20 billion in Florida for a total of some 38,000 homes.

The chart below shows the strong presence of Brazilians  buyers in Miami and Orlando.

Interestingly, as the chart below shows, Brazilians are paying significantly more for Florida residence than other foreigners. This is probably an indication that purchases are meant to be primary residences and not vacation homes.

Trade Wars

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Brazil Watch

EM Investor Watch

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Investing

 

One thought on “Domestic Capital is Fleeing Emerging Markets”

  1. Jean, very interesting piece. The Miami-Ft.Lauderdale area has been changing for years but one thing you will notice is that while Spanish is the predominant foreign language in the region, you hear much more Portuguese from the influx of Brazilians as your piece suggests. It is also interesting that this migration of HNWIs is happening not because of a value proposition in Florida real estate (like after the US banking crisis) but rather because of political and economic uncertainty in Brazil. Would you consider this a bear signal for the Brazilian equity market?

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