Foreign investors continued to scoop up emerging market bonds and stocks in Asia last month, no doubt encouraged by modest US dollar weakness on the back of declining US treasury yield.
According to ANZ, inflows totaled $US8.6 billion in February, building upon the $US6.3 billion inflows seen in January.
$US3.5 billion flowed into stocks, outpaced by a $US5.1 billion investment in bonds.
As seen in the chart below from ANZ, the recent trend is in stark contrast to $US33 billion in outflows reported in the final quarter of last year. Capital flows are overlaid against movements in emerging market currencies versus the US dollar, demonstrating the relationship between the two.
Where the US dollar moves, capital flows have a tendency to do the opposite.
Khoon Goh, head of Asia research at ANZ Bank, said South Korea and India accounted for most of the inflows reported in February.
“South Korea and India accounted for most of the region’s inflows at $US5 billion and $US2.5 billion, respectively,” he said.
“The strong inflows into South Korea was mainly into its debt market, unwinding the selloff that occurred during the second half of 2016. It was a similar situation for India, which saw inflows for the first time after four consecutive months of outflows.”
Offsetting those gains, outflows were reported in Malaysia, the Philippines and in Chinese bonds, albeit small in nature.
The full breakdown of capital flows in and out of the region over the past six months is found in the table below from ANZ.
Despite the recent inflows to the region, with the US dollar and bond yields rising sharply in early March, Goh says that sustaining the current trend may be “challenging”.
“In the near term, sustaining the inflows seen over January and February will be more challenging given looming Fed rate hikes and rising US 10-year yields,” he says.