- Emerging markets have been smashed this year, including in Asia.
- It appears recent declines may be prompting some foreign investors to buy back in.
- Inflows to the region increased for a second consecutive month in August. Net buying was recorded in both stocks and bonds, something that has not been seen since January this year.
Recent declines across emerging markets, steep in many instances, appear to be encouraging foreign investors to buy back in.
Including in Asia.
According to ANZ Bank, foreign capital inflows into markets across the region increased for a second consecutive month in August, led by buying in both stocks and bonds.
“Asia ex China recorded net foreign portfolio inflows of $US6.6 billion in August, up from the $US2.2 billion of inflows seen in July,” said Khoon Goh, Head of Asia Research at ANZ.
“Both equity and bond markets saw net inflows in the month for the first time since January this year.”
Goh says the lift in inflows, despite ongoing volatility in some specific markets such as Turkey, India and Indonesia, suggests investors are not “lumping the region into the same basket as other emerging markets”.
“Asia’s fundamentals are in much better shape compared to other emerging market regions,” he says.
“Attempts by the Chinese authorities to prevent further depreciation in the Chinese yuan in the latter part of the month likely also contributed to the inflows.”
As seen in the table below from ANZ, after being net sellers over the prior six months, foreigners were net buyers of stocks for the first time since January, helped entirely by inflows to South Korean and Taiwanese markets.
“The strong current account surpluses of South Korea and Taiwan likely made these economies relatively attractive, and they may have benefited from investor reallocation from other emerging markets,” said Goh.
Inflows into bonds across the region also strengthened, lifting from $US2.6 billion a month earlier to $US4.7 billion in August.
And unlike stocks, the headline increase reflected broad-based buying across the region.
That trend was also evident in foreign demand for Chinese bonds which attracted a further $US7.9 billion of inflows despite a continued escalation in trade tensions with the United States.
Goh said the buying was concentrated in Chinese government bonds, hinting it was likely driven by foreign central banks seeking to increase their FX reserve allocation into the Chinese yuan.
Despite ongoing inflows into both Chinese stocks and bonds, and the recent reversal of outflows across the broader Asian region, Goh says those trends may be hard to sustain in the months ahead.
“Investor sentiment towards emerging markets is still fragile,” he says.
“While Asia’s fundamentals are in much better shape than Turkey or Argentina, the region is vulnerable to the escalation in US-China trade tensions.
“Add to that the US Federal Reserve continuing with policy normalisation, portfolio flows into Asia look set to remain volatile.”
Underling that point, Goh says that after attracting inflows over the past two months, outflows returned in the first full week of September.
On Friday, US President Donald Trump said he could move “very soon” to impose tariffs on $US200 billion in imports from China, with levies on a further $US267 billion in products “ready to go on short notice”.
Separate economic data released during the session also revealed US average hourly earnings grew by 2.9% in the 12 months to August, the fastest increase in nine years. That saw US bond yields lift sharply, and attracted further buying in the US dollar, reflecting increased confidence the US Federal Reserve will lift official interest rates not once but twice before the end of the year.
As has been seen since the end of January, the combination of geopolitical concerns, higher US bond yields and a firmer greenback has not typically benefited gains in emerging markets, including in Asia.
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