Foreign investors are selling Asian emerging market assets at the fastest pace since China devalued its currency

Photo: Matt Cardy/Getty Images

Foreign investors are selling out of Asian emerging markets at the fastest pace seen since August last year.

That was when China rattled financial markets by suddenly deciding to weaken its currency, sparking a wave of volatility not seen since the European debt crisis.

Perhaps it’s a precursor to what lies ahead?

According to research from ANZ Bank, net outflows from stocks and bonds, excluding China, totalled $US6.6b billion in October with sales of bonds accounting for the bulk of that at $US5.1 billion.

For China specifically, ANZ notes that bond inflows, at $US3.1 billion, remained strong, albeit well off the levels seen in the previous two months ahead of the yuan’s inclusion in the IMF’s special drawing right (SRD) basket.

This chart from ANZ shows the scale of the selling seen last month, excluding the inflows seen into China:

And it wasn’t just because of heightened uncertainty due to the US federal election.

“While US election-related uncertainty contributed partly to the outflows, we do not think it was the main driving force,” said Khoon Goh, head of Asia research at ANZ.

“In our view, the increased expectations of a December rate hike from the US Federal Reserve and the rise in bond yields in major developed markets were the bigger drivers.”

This, in turn, helped to boost the US dollar, attracting inflows as expectations for higher US interest rates, along with the perceived likelihood of Hillary Clinton winning the US election.

As seen in the chart below, also from ANZ, there is a clear relationship between movements in the US dollar against Asian emerging market currencies and capital flows in and out of of the region.

Somewhat ominously, Goh says that portfolio flows into the region look set to stay volatile even if Hillary Clinton takes the presidency “as market focus will quickly turn to the US monetary policy outlook”.

One only has to look back to late last year, when the US Fed lifted interest rates for the first time in nearly a decade, to see what could potentially happen.

Then, like now, a rate hike in December was widely expected, and it still led to a tumultuous period for both emerging and developed markets.

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