$2.2B Outflow Ends Asia Stock-Buying Streak, Optimism Holds

Global funds pull nearly $2.2 billion from emerging Asia markets, ending a five-month buying streak amid US rate cut delays.

By Athena Xu

4/17, 02:46 EDT

Key Takeaway

  • Global funds withdraw nearly $2.2 billion from emerging Asia markets, ending a five-month buying streak due to scaled-down US rate cut expectations.
  • High borrowing rates, strong US economy, and rising oil prices contribute to outflows, with Taiwan experiencing significant losses.
  • Despite market challenges, optimism for Asia's quarterly earnings growth persists, driven by tech sector and improving Chinese dividends.

Emerging Markets Retreat

Global funds have begun to withdraw from emerging markets in Asia, marking the end of a five-month buying spree. This shift comes as expectations for US rate cuts are scaled down, leading to a net sale of nearly $2.2 billion in equities within these markets for April, as reported by Bloomberg. This change in investment behavior ends the longest streak of purchases since 2017, with Taiwan experiencing significant outflows, while South Korea has seen net inflows. The MSCI EM Asia Index is on the verge of losing its year-to-date gains, primarily due to concerns that the Federal Reserve will postpone rate cuts.

Rate Cut Delays and Economic Pressures

The Federal Reserve's indication, through Chair Jerome Powell, of a delayed approach to interest rate cuts has heightened investor concerns. This stance is expected to influence emerging market central banks to similarly delay rate cuts. The combination of persistently high borrowing rates, a strong US economy, rising oil prices, and Asia's dependence on imported energy exacerbates the cost pressures. These factors, alongside higher US rates enhancing the appeal of Treasuries over regional stocks, contribute to the outflow from emerging markets. Morgan Stanley strategist Jason Ng noted a $2.7 billion outflow from active emerging market funds in March, with investors shifting their focus away from tech-heavy markets like Taiwan.

Market Volatility and Economic Data

The MSCI Asia Pacific Index's downturn reflects broader market volatility and economic challenges. Factors such as geopolitical tensions in the Middle East, a strong dollar, and China's slow economic recovery have impacted the index, which had previously seen a gain of more than 5% in 2024. Mixed economic data from China, including disappointing retail sales and industrial output against better-than-expected GDP growth, has added to the market's instability. This volatility is further evidenced by the Australian stock benchmark and South Korea’s small-cap gauge nearing technical corrections.

Earnings Season Optimism

Despite the prevailing market challenges, there is optimism surrounding Asia's quarterly earnings growth. This optimism is fueled by expectations of profit growth in technology stocks, the artificial intelligence boom, and improving Chinese dividends. The MSCI Asia Pacific Index is anticipated to see its first year-on-year profit growth in eight quarters, driven by these sectors. Gary Dugan of Dalma Capital Management Ltd. remains positive about the regional fundamentals but cautions against the impact of high US rates and a strong dollar on market performance.

Street Views

  • Jason Ng, Morgan Stanley (Neutral on emerging markets in Asia):

    "Active emerging market funds saw an outflow of $2.7 billion in March amid rising bets that the Fed will delay easier policy... notably they reduced tech-heavy Taiwan, while adding to positions in Saudi Arabia, Turkey and United Arab Emirates."