This would tend to push water uphill – a countervailing capital flow substitution effect; and    Third, a change in the composition of the global market portfolio as emerging economies account for a larger slice of the pie – a capital flow income effect. By combining these three factors, we can form a proximate picture of the emerging pattern of global capital flows. These projections are based on the same restrictive set of modelling assumptions. Nonetheless, they provide a transparent window on possible emerging patterns. Are the forces of financial deepening in emerging capital markets sufficient to outpace the reduction in advanced country portfolio home bias, lessening the BFSP problem? Or does portfolio reallocation by advanced economies risk swamping embryonic emerging capital markets exacerbating this problem? Chart 13 looks at the ratio of annual average capital flows to G20 emerging markets relative to their market capitalisation over the period 2010 to 2050. It is the analogue of Chart 2, using projections of both numerator and denominator. The highest and lowest annual inflows over the projection period are also shown to capture potential annual variation in capital flows. Chart 14 plots annual gross capital inflows to emerging markets over the same period. 5  Non-G20 market cap is assumed to grow in line with the forecast for total G20 market capitalisation.
BIS central bankers’ speeches  7  Some notable points include:   Over the period 2010 to 2050, the average scale of capital inflows, relative to market capitalisation, for the G20 emerging markets is around 8% per year. That is greater than the peak inflow experienced in the recent past, including in 2010, during which time asset prices rose significantly and protective policy measures were put in place.   Given the likely variation in these inflows year by year, the picture is even more striking. Potential “peak” inflows are into double digits for the majority of G20 emerging markets. As context, peak portfolio equity inflows to East Asian countries in the three years preceding their 1990s crisis averaged 4% of market capitalisation.   For some individual emerging market countries, these capital inflow patterns are dramatic. For example, over the period 2010–2050, average inflows to India and Indonesia exceed 10% of their equity market capitalisation. Taken together, these projections do not suggest a dissipation of the BFSP problem. More likely, they suggest it could intensify, perhaps significantly, in the period ahead. If capital markets operated efficiently, these portfolio flows need not cause waves in emerging credit and asset markets. In practice, frictions in the functioning of these markets mean that asset market spillovers seem very likely to persist. In other words, the splashes from the big fish risk causing waves every bit as great, and potentially greater, than those seen recently.