Foreign capital is flooding back to emerging markets across Asia, particularly for stocks.
According to new research released by ANZ today, capital inflows to the region rose to $US15.3 billion in March, the largest one-month increase since the middle of last year.
It was the third consecutive month that net inflows were recorded, all but unwinding similarly large outflows seen in the final three months of last year.
As this excellent chart from ANZ demonstrates, continued weakness in the US dollar against currencies in the region was probably a contributing factor behind the pickup in capital flows to the region.
As the historic pattern shows, where the US dollar tends to move, capital flows to the region tend to do the opposite.
According to Khoon Goh, head of Asia research at ANZ, the inflows reported in March was not only due to an unwinding of the “Trump trade” — something that helped power the US dollar, stocks and bond yields higher in the immediate aftermath of Donald Trump’s election as US president — but also optimism about the economic outlook for the region.
“An unwinding of the Trump trade is part of the reason behind the inflows into Asia. But there is more to this,” he says.
“In our view, the strong inflows are also a sign that investors are pricing in expectations of a strong rebound in the region’s growth, including the possibility of Asian central banks joining the Fed’s tightening cycle soon.
“The strong export rebound and improving PMI data has certainly raised investor hopes.”
Fitting with that optimistic view, investors clearly favoured growth-orientated assets such as stocks, buying four times more than inflows into bonds.
“Equity led the inflows, totalling $USD12.4 billion versus bond inflows of just $US2.9 billion,” said Goh.
“The strong equity inflows into the region were due to a combination of an unwinding of the Trump trade and investors positioning for an Asian reflation trade.”
This table from ANZ shows net capital flows into emerging market stocks and bonds across Asia over the past six months.
Inflows into stocks were recorded in all markets apart from the Philippines last month. On the bond side of the ledger, capital flowed to all markets apart from Malaysia which saw net selling of $US5.9 billion.
That was likely in response to a crackdown initiated by Bank Negara Malaysia, the nation’s central bank, aimed at curbing volatility in the Malaysian ringgit.
However, while foreign investors turned cold on Malaysian bonds, that can’t be said for their appetite for Indian stocks and bonds.
They surged to $US9.1 billion, the largest one-month increase ever reported.
The nation’s recovery from the shock demonetisation decision from Indian PM Narendra Modi on November 8 last year, which banned the use of 500 and 1,000 rupee notes in order to curb corruption and the use of counterfeit notes, has clearly caught the eye of foreign investors.
While not all markets managed to attract inflows last month, the general theme from the data suggests that foreign investors are now far more optimistic on the outlook for the region that what was the case just a few months ago.
Although a bullish sign for markets across the region, Goh suggests there’s still reason for caution moving forward.
“It is too soon to be expecting a genuine growth recovery beyond exports at this stage,” he says.
“For the portfolio inflows to be sustained, the data needs to show a broader growth recovery, which we feel is not likely in the near-term.
“Recent geopolitical tensions are also a reminder that markets have been too sanguine on event risks of late.”
As such, Goh suggests that some investors may be getting ahead of themselves in positioning for the Asian reflation trade, and could be due for some disappointment.