- Foreign investors are flocking back to emerging markets across Asia.
- Net foreign capital inflows into the region were $US22.2 billion in the March quarter, almost recouping all of the outflows that occurred last year.
- A dovish shift from major central banks and hopes for a US-Sino trade deal have helped to reverse sentiment and capital flows in the region.
- Buying of Indian stocks and bonds was particularly frenetic.
A dovish shift from major central banks and hopes for a trade agreement between the United States and China saw foreign investors continue to pile into emerging markets across Asia in March, ending off a strong quarter for capital inflows into the region.
Excluding Chinese markets, net capital inflows surged to $US11.2 billion, according to analysis from ANZ Bank, the largest monthly increase since the start of 2018. That was up from $US6.7 billion in February, leaving total net inflows during the March quarter at $US22.2 billion, almost recouping all of the $US26.2 billion worth of net outflows that were seen last year.
The tide of capital went out, but now it’s coming back into the region, and fast.
ANZ put the renewed buying spree down to a dovish shift from the US Federal Reserve and positive progress on the US-China trade talks as two factors that helped to boost risk appetite for assets across the region.
Another factor was strong inflows into Indian assets ahead of the nations general election.
“Foreign investor flows into Asia ex-China stocks were positive for the third consecutive month at $US5.7 billion in March,” said Khoon Goh, Head of Asia Research at ANZ bank.
“However, this figure was inflated by a USD6.1bn surge in equity inflows into India, the second largest on record. Foreign investors are buying Indian equities on expectations of policy continuity following the general elections, and also amid the prospect of further RBI rate cuts helping to lift economic activity.”
Strong inflows into Indian bonds was also seen, accounting for $US2.9 billion of the $US5.4 billion total across the region ex-China last month.
“Given a dovish US Federal Reserve, which signalled at their March meeting an end to the hiking cycle and an early termination to balance sheet normalisation, and positive progress on the US-China trade talks, we would have expected more broad-based inflows than what we saw in the month,” Goh said.
This table from ANZ shows net foreign capital inflows to individual assets and nations over the past eight months.
Suggesting offshore enthusiasm for the region has not shown any signs of cooling down, Goh said net inflows in the first week of April were also brisk, totalling $US1.8 billion.
“The improvements in the latest data have helped keep the equity inflows into the region going in the first week of April,” he said. “Unlike in March, the early April inflows were not dominated by India.”
However, after such a strong period of inflows, Goh says buying of this magnitude may be hard to sustain given so much good news is already priced in to the outlook for the region.
“Further sustained inflows will not be as easy to come by, especially with markets already pricing in the dovish Fed and a successful conclusion to the US-China trade talks,” he said.
As such, Goh says fleeting signs of an improvement in recent economic data will likely need to be sustained to encourage continued inflows into the region.
“What are needed are signs that the region’s export slump is close to bottoming and economic activity is starting to improve. On this front, there have been some positive signs of late,” he said.
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