This paper analyses the role of non-bank intermediaries in financing emerging economies during the period 2012-2020, focusing on their allocative choices. With reference to investment funds, their responsiveness to the global financial cycle is examined, taking into account investment strategies and geographical focus. In addition, we study how the variability of portfolio inflows to emerging economies depends on the share of their external liabilities held by investment funds.
During periods of financial turmoil, investment funds tend to reduce their exposure to emerging economies more than do banks and other intermediaries. Passive funds, and in particular ETFs, show a greater pro-cyclicality than the other types of funds. Portfolio inflows are more volatile in emerging markets with a higher share of portfolio liabilities held by investment funds rather than by banks and other financial intermediaries.
