Foreigners were piling into stocks across Asia before trade tensions increased this week

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  • Foreign investors piled into emerging market stocks in Asia last month, recording the largest net capital inflow since early 2017.
  • That buying spree may prove to be a case of unfortunate timing given renewed trade tensions between China and the US this week.
  • Stocks across the region have fallen heavily since the start of trade on Monday, and capital flows have reversed.
  • Trade talks between China and the US resume in Washington on Thursday. The US intends to lift tariffs on $US200 billion worth of Chinese imports from Friday. China has promised to retaliate to any US move.

Foreign investors piled into emerging market stocks in Asia during April, recording the largest net capital inflow into the region since March 2017, according to analysis from ANZ Bank.

“Stocks saw net foreign buying of $US9.2 billion,” said Khoon Goh, Head of Asia Research at ANZ.

“Improving China economic activity partly helped spur the stock inflows into the region, though the numbers were also inflated by a one-off takeover deal in Indonesia.

Excluding the deal, stock inflows into Asia ex-China was still robust at $US5.4 billion.

So it was still a pretty big amount, adding to the $US17.8 billion in inflows recorded in the prior three months.

According to Goh, inflows got off to another good start in early May.

Unfortunately, this happened shortly after.

An escalation in trade tensions between the United States and China, potentially seeing both sides introduce tit-for-tat tariff hikes as early as Friday, has wrong-footed many investors who were positioned for a trade deal to be agreed on.

“Markets had priced-in a positive outcome, so renewed uncertainty over the trade deal led to a selloff in Asian markets and foreign equity outflows,” Goh said.

Since Donald Trump tweeted before Asian markets opened on Monday, the MSCI Emerging Markets Asia Index has slumped 3.3% with losses extending further across the region on Thursday.

Goh says the outcome of trade talks will determine the outlook for foreign capital flows and stock prices in the period ahead.

“How portfolio flows evolve will largely depend of whether the negotiations this week end with a deal or not,” he said.

That’s the great uncertainty, but at this stage it’s not looking all that promising.

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