- Foreign investors continued to ditch stocks and bonds across emerging markets in Asia last month.
- Foreign investor outflows from the region totalled $US10.4 billion in May, adding to the $US10.1 billion outflows recorded a month earlier.
- Capital inflows have resumed in early June. Whether that continues will likely be determined by monetary policy decisions from the US Fed and ECB this week.
Emerging markets have endured a torrid few months, including in Asia.
Stocks, bonds and currencies have been under pressure, a performance in stark contrast to much of last year.
Part of that story has been a reversal in foreign capital flows, as seen in the table below from ANZ Bank.
Excluding Chinese markets, foreign investor outflows from the region totalled $US10.4 billion in May, adding to the $US10.1 billion outflows recorded one month earlier.
“Stresses in a few emerging market economies in other regions spilled over into Asia despite its better fundamentals,” said Khoon Goh, Head of Asia Research at ANZ.
Goh said much of the outflows were concentrated in stocks last month.
“Broad-based selling was seen in equities, totalling $US6.4 billion, the fourth consecutive month of outflows,” he said.
“This four-month stretch is the longest and largest equity outflow since the June to September 2015 period.”
With the exception of Chinese, Korean and Philippine debt markets, there were also large capital outflows recorded in bonds as well.
“On the debt side, outflows of $US4 billion were recorded, the largest since December 2016,” Goh said.
“Malaysia saw the highest outflows in May, followed by India.”
While broad outflows were recorded across the region, Chinese debt markets managed to buck the trend, continuing the divergence seen since the beginning of the year.
“China continued to attract strong foreign demand for its bonds, extending its consecutive run of net inflows to 15 months,” Go said. “We suspect that most of the buying comes from foreign central banks looking to allocate more of their reserves to Chinese yuan.”
While the data doesn’t capture capital flows to Chinese stocks, Goh says capital inflows into China likely increased during the month.
“There were strong Northbound flows from the Shanghai and Shenzhen stock connects in April and May, ahead of the MSCI inclusion of China A-shares from 1 June,” he said.
While, from a broader perspective, foreign capital outflows have dominated in recent months, Goh says many of the factors that contributed to the reversal are now starting to dissipate, hinting that inflows may soon resume.
“The main triggers of the EM selloff — rising US yields, high oil prices and a stronger USD — have retraced from late May,” he says.
“As such, we may be past the worst of the sell-off.”
Goh says early indications suggest that’s already taking place, noting that inflows have started to return over the early part of June.
“[This] could be the start of foreign investors rebuilding their positions in the region,” he says.
While more attractive valuations and fundamentals may be spurring renewed buying, whether that continues in the short-term will likely be determined by central bank policy decisions from the US Federal Reserve and European Central Bank in the days ahead.
Any signs that policy could be tightened faster than markets currently anticipate could lead to renewed selling in emerging markets, especially among those reliant on foreign capital markets to fund borrowing requirements.
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