- Foreign investors were quick to dump emerging market stocks across Asia when volatility spiked in early February.
- Net outflows were the largest since August 2015 when a devaluation in the Chinese yuan rattled financial markets.
- The speed and scale of outflows offers hints as to how investors may react should US bond yields continue to rise.
Foreign investors dumped stocks across Asia last month following a spike in financial market volatility, recording the largest net outflow in over two years.
And that provides more than a few clues as to what the future may hold should US bond yields continue to lift.
According to ANZ Bank, net outflows from emerging markets totaled $US10.7 billion in February, the largest since August 2015 when a shock devaluation of the Chinese yuan rattled financial markets.
Foreigners also sold a net $US1 billion in bonds over the month, leaving total outflows from the region, excluding China, at $US11.7 billion, the highest since the US Presidential election.
The chart below from ANZ reveals the sharp reversal in fund flows seen in February compared to January.
“The selloff in the US equity market over the early part of February on inflation concerns spread quickly into Asia,” said Khoon Goh, Head of Asia Research at ANZ. “Outflows were broad-based, with only the South Korean bond market managing to attract inflows.”
Goh says outflows from stocks continued in the early parts of March, albeit not to the same degree as in February.
“Although market concerns over inflation and rising US yields have eased somewhat, fresh worries have arisen over trade protectionism following the US decision to impose tariffs on steel and aluminium. But the offer by North Korea to talk about denuclearisation has improved investor sentiment,” he says.
“This, alongside continued growth momentum in Asia, should limit the extent of further outflows and eventually see inflows resume.”
While a recent pullback in US bond yields helped reduce market volatility and boost investor sentiment of late, the speed and scale at which money was pulled last month tells you plenty about the mindset of investors when it comes to riding out any further bouts of volatility.
Even with stronger global economic conditions — something that usually supports emerging markets — investors ran for the exits at the first sign of trouble.
Should tight labour market conditions and recent tax cuts lead to a greater pickup in US inflationary pressures, it will raise not only the risk of higher bond yields but also increased volatility across markets, especially at the riskier end of the spectrum.