Foreign investors piled into emerging markets across Asia in the first half of 2017, encouraged by a weaker US dollar, lower bond yields and improving economic conditions.
At $63.6 billion, net foreign capital inflows into bonds and stocks were the largest since the second half of 2012, according to new research from ANZ.
Just have a look at the chart below for evidence as to just how large inflows were during this period, easily reversing the outflows late last year when the US dollar and treasury yields were ripping higher in response to the election of Donald Trump.
“Investor appetite for Asian assets has not been dented by the ongoing policy normalisation by the US Federal Reserve,” said Khoon Goh, head of Asia research at ANZ.
“India was once again the largest recipient of foreign investor flows, accounting for half of the total inflows to the region, most of which went to the Indian debt market.
“South Korea accounted for a further third of the region’s total inflows in June.”
Unsurprisingly, both Indian and South Korean stocks surged over the half, hitting the highest levels on record.
However, things have changed recently.
The US Federal Reserve appears set to begin reducing the size of its balance sheet, while other major central banks have also signaled that a normalisation in monetary policy away from emergency settings is also likely occur, creating a headwind for capital inflows to Asia as monetary conditions begin to tighten.
To Goh, conditions for further strong inflows into Asia are now looking less conducive than earlier this year, something he says could lead to renewed declines in asset prices across the region.
“Should we see a synchronised removal of accommodation by the G7 central banks, this will reduce global liquidity as well as push global bond yields higher,” he says. “This will eventually lead to some unwinding of the strong inflows into Asia, which will impact negatively on the region’s asset prices.”
After such as solid run, that sounds like a warning that it could be time to take some money off the table.