Some of Asia’s biggest stock and bond markets outside China are seeing greater outflows than in previous market crises, and the process might just be getting underway.
Global funds offloaded a net US$40 billion of equities across seven regional markets last quarter, exceeding any three-month period characterized by systemic stresses since 2007.
The steepest selling was in tech-heavy Taiwan and South Korea and energy-importing India, while foreign investors also made supersized outflows from Indonesian bonds.
Photo: CNA
Money managers are pulling out of higher-risk markets as rampant inflation and aggressive central bank interest-rate hikes sap the outlook for global growth. Fears of a US recession and supply-chain disruptions in Europe and China in a global economy still recovering from COVID-19 lockdowns are providing additional reasons to sell.
“We would expect investors to remain cautious toward export-oriented economies and markets with high valuation under the current backdrop,” said Pruksa Iamthongthong, senior investment director for Asia equities at abrdn PLC in Singapore. “We expect the outlook to remain uncertain for the technology sector globally on rising recession risks.”
The total amount of equity outflows for the quarter is an aggregate of those from Taiwan, India, Indonesia, Malaysia, the Philippines, South Korea and Thailand.
The sum for the past three months was then compared with three previous episodes: the global financial crisis of 2008, the 2013 taper tantrum and the peak of the US Federal Reserve’s last rate-hike cycle in 2018.
Foreigners withdrew a net US$17 billion from Taiwanese stocks, easily surpassing the outflows seen in any of the three previous periods. Indian shares saw US$15 billion of sales, and South Korea reported US$9.6 billion, also exceeding the earlier periods.
The Fed’s aggressive tightening, which is pushing up US yields, is expected to keep drawing money away from the region. Swaps are pricing in a further 150 basis points of rate hikes from the US central bank this year.
“The reason foreign investors are selling shares in those markets is not because something has gone wrong in them, instead, it’s because the Federal Reserve and other central banks are tightening their monetary policy,” said Mark Matthews, head of research for Asia Pacific at Bank Julius Baer in Singapore.
One of the main themes thrown up by the data is selling of technology shares, which account for more than half of Taiwan’s equity benchmark and about one-third of South Korea’s.
The weakening yen is also hurting the economy and equities in Taiwan and South Korea, given that the two countries have similar export products to Japan, said Calvin Zhang, a fund manager at Federated Hermes in Pepper Pike, Ohio.
This is leading to the fear that they will lose market share, he added.
Indian stocks have come under pressure as the economy reels from surging oil prices, while the central bank rapidly raises interest rates to try and bring inflation under control.
“The double whammy for Asia — rapidly tightening liquidity in developed markets and high fuel prices — could continue to weigh on Asian currencies and depress flows into Asian financial markets for the time being,” Manishi Raychaudhuri, head of Asia Pacific equity research at BNP Paribas SA in Hong Kong, wrote in a research note last week.
Bond markets were more mixed with Indonesia seeing outflows of about US$3.1 billion, while South Korea and Thailand saw money coming in.
Moderate bond outflows from emerging Asia “should persist in the second half alongside the narrowing trend of Asia-US policy rate differentials and subdued outlook for Asian growth,” said Duncan Tan, a rates strategist at DBS Group Holdings Ltd in Singapore.
The outlook for US dollar-denominated corporate bonds in the region is also challenging given that spreads offered over Treasuries are becoming less attractive compared with their US peers. Yield premiums on investment-grade Asian bonds fell below those of US debt late last month for the first time in more than two years.
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