Foreign investors continued to pile into emerging market bonds across Asia in July, but for the first time in seven months, they decided to sell equities.
A sign perhaps that investors are becoming wary about chasing riskier assets after a strong start to the year, particularly with heightened geopolitical tensions on the Korean Peninsula and the prospect of tighter global monetary policy settings in the period ahead.
According to ANZ, net inflows into the region fell to $US3.9 billion last month, a sharp step down from the level of the previous six months.
It was the smallest total since December last year, and followed a $US9.3 billion inflow in June. Within that total, bond inflows stood at $US4.7 billion, masking a net outflow from stocks of $US800 million, which continued into August.
“We have already seen $US2.8 billion of outflows from the region’s equity markets in August so far, putting downward pressure on asset prices,” said Khoon Goh, head of Asia research at ANZ.
Goh put the reversal in stock flows down to a combination of profit-taking, geopolitical concerns an uncertainty over the outlook for monetary policy from several major central banks.
“We noted last month that the conditions for further strong foreign portfolio inflows into Asia were looking less conducive, as the major developed market central banks get closer towards reducing global liquidity,” he says.
“Add to that the escalation of geopolitical tensions in the Korean peninsula following North Korea’s latest missile test on 28 July, and the risk of further unwinding of the strong first half inflows is high.”
However, while from a broader perspective investors shunned stocks but bought bonds, one thing remained the same — they continued to pile into Indian assets.
“India received most of the region’s foreign inflows in July, totalling $US3.3 billion,” said Goh, noting that it was the only nation to have inflows into its equity and bond markets over the month.
“Investors continue to be attracted to India’s reform story,” he says.