Foreign capital outflows from emerging markets in Asia look set to be the largest since the GFC

Zhai Yujia/China News Service/VCG via Getty Images
  • Foreign investors have pulled $US26.1 billion in capital from emerging market stocks and bonds in Asia this year.
  • Unless inflows surge in the coming weeks, 2018 looks set to be the first year of foreign capital outflows from the region since 2008.
  • ANZ Bank says choppy capital flows are likely to persist in the new year, in part due to trade uncertainty and increased concern about the global economic outlook.

2018 has been a year where international investors have shunned stocks and bonds in emerging markets across Asia, a view in stark contrast to what was seen in prior years.

Even with modest capital inflows in November, sparked by hopes of a lasting trade truce between the United States and China, net foreign capital outflows are on track to be the largest since the GFC.

“We are certain to see overall net outflows from the region for the first time in a calendar year since 2008. The only question is how large it will be,” says Khoon Goh, Head of Asia Research at ANZ Bank.

“With one month left in 2018, year-to-date outflows totalled $US26.1 billion.

“Whatever the final amount turns out to be, it will not be as large as the $US63.4 billion of outflows seen during the 2008 Global Financial Crisis.”

So not as severe as what was seen back in 2008, but still a significant reversal from the trend seen in every year since.

ANZ Bank

While net foreign inflows totaled $US5.1 billion last month, led by modest buying across stocks and bonds in most individual nations following solid outflows in prior months, Goh says skepticism surrounding the trade deal struck between China and the United States on the sidelines of the G20 Summit late last month has already seen outflows from the region resume in the first week of December, especially for stocks.

“The initial equity inflows following the ceasefire news did not last, and in the week since then we have seen a revival of outflows, totalling $US1.4 billion,” he says.

“Bond flows in the region are proving more resilient, thanks to the decline in US 10-year bond yields which have fallen from their recent high of 3.26% in October to 2.84% currently.”

Goh expects a continuation of choppy capital flows will likely continue early in the New Year.

“The lack of details surrounding the trade ceasefire agreement, and whether wider structural issues can be addressed within 90 days mean the risk of a re-escalation in trade tensions remains. In addition, increasing concerns over slowing global growth have started to impact on asset prices and portfolio flows,” he says.

“The year looks set to end with continued volatility in flows. This looks likely to continue into the new year as well.”

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