Some of Asia’s largest stock and bond markets outside of China are seeing larger capital outflows than in previous market crises, and the process may be just beginning.
Global funds offloaded a net $40 billion worth of stocks across seven regional markets last quarter, topping any three-month period characterized by systemic stress since 2007, while overseas investors also made massive outflows of shares. Indonesian bonds.
Fund managers are retreating from high-risk markets as runaway inflation and aggressive central bank interest rate hikes undermine global growth prospects. Fears of a recession in the United States and supply chain disruptions in Europe and China in a global economy still recovering from Covid-19 lockdowns provide additional reasons to sell.
“We expect investors to remain cautious towards high valuation export-oriented economies and markets in the current environment,” said Pruksa Iamthongthong, senior investment director for Asian equities at abrdn plc in Singapore. , adding: “We expect the outlook to remain uncertain for the tech sector globally on rising recession risks.
The total amount of equity outflows for the quarter is an aggregate of those from India, Indonesia, Korea, Malaysia, Philippines, Taiwan and Thailand.
The sum of the past three months was then compared to three previous episodes: the global financial crisis of 2008, the taper tantrum of 2013, and the peak of the last US Federal Reserve (Fed) rate hike cycle in 2018.
Foreigners took $17 billion net out of Taiwanese stocks, easily exceeding the outflows seen in any of the previous three periods. Indian stocks saw sales of $15 billion and Korea brought in $9.6 billion, also beating previous periods.
Aggressive Fed tightening, which is pushing US yields higher, should continue to pull money out of the region. The swaps are pricing in an additional 150 basis points of rate hikes from the US central bank this year.
“The reason foreign investors sell stocks in these markets isn’t because anything went wrong. Instead, it’s because the Fed and other central banks are tightening monetary policy,” said Mark Matthews, head of research for Asia-Pacific at Bank Julius Baer in Singapore.
One of the main themes raised by the data is the sell-off of tech stocks, which make up more than half of Taiwan’s stock benchmark and about a third of Korea’s.
Tech stocks have fallen around the world this year on worries about slowing global growth and high valuations following gains they made during the pandemic.
The weaker yen is also hurting the economy and stocks in Taiwan and Korea, given that the two countries have similar export commodities to Japan, Federated Hermes fund manager Calvin Zhang told Pepper. Pike, Ohio. This raises fears that they will lose market share, he said.
Meanwhile, Indian stocks came under pressure as the economy suffered from soaring oil prices, while the central bank rapidly raised interest rates in an attempt to tame inflation.
Benchmark stock indexes in Taiwan, Korea and India all fell in intraday trading on Monday, extending declines this year.
There were also bright spots. Indonesia and Thailand saw capital inflows into their stock markets in the last quarter, while capital outflows from two other close neighbours, Malaysia and the Philippines, were relatively weak.
This may in part be due to the more dovish approach of Southeast Asian central banks, which seek to slow increases in borrowing costs while supporting fragile post-Covid recoveries.
Bond markets were more mixed, with Indonesia seeing outflows of around $3.1 billion, while Korea and Thailand saw inflows.
Indonesian debt fell out of favor as its high-beta bonds sold off more heavily than its regional counterparts amid fears of a global recession.
Subdued bond outflows from emerging Asia “should persist in the second half of the year alongside the trend of narrowing policy rate differentials between Asia and the United States and the lackluster outlook for Asian growth,” it said. said Duncan Tan, rates strategist at DBS Group Holdings in Singapore.
The outlook for dollar-denominated corporate bonds in the region is also challenging, as the spreads offered over Treasuries become less attractive relative to their US counterparts. Yield premia on Asian investment-grade bonds fell below those on US debt in late June for the first time in more than two years.
“The decline in relative value versus the U.S. will slow fund inflows from developed markets or even lead to outflows,” said Joyce Liang, head of credit research for Asia-Pacific at BofA. Securities in Hong Kong, adding: “Risks are on the downside for spreads.”
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