- Equity markets are in red YTD, diverging from better-performing Northeast Asian markets and India.
- Catalysts such as portfolio rebalancing and a return to domestic growth themes may spur inflows.
- Foreign interest in bond markets varies, driven by rate differentials and macro stability buffers.
- The pace of ASEAN’s bond inflows in 2H hinges on the Fed’s pivot and stable regional rates.
Commentary: Portfolio flows hinge on global cues
Supply chain shifts through the adoption of the ‘China+1’ strategy have unequivocally benefited the ASEAN region. While regional economies have long attracted foreign direct investment inflows, two push factors have accelerated that move since 2017: de-risking since the onset of US-China tensions and supply chain reconfigurations brought about by the pandemic.
Portfolio flows, on the other hand, have been a mixed bag. Equity markets have witnessed net outflows on a year-to-date (YTD) basis in the five countries in ASEAN-6 – Indonesia, Malaysia, Philippines, Thailand, and Vietnam – for which regular data is reported. This contrasts with strong net inflows into South Korea, Taiwan, Japan, and India. The direction of flows is also mirrored in the key indices’ performance, with Taiwan’s Taiex up more than 30% YTD (TSMC at a record high), alongside strong gains in South Korea’s Kospi, and Japan’s Nikkei, all of which are topping the charts in Asia. This is followed by India’s equity indices up 11.0-12.5% on a YTD basis, establishing fresh record highs. ASEAN markets lag this exuberance. Notably, few of the better-faring Asian markets have also seen an upsurge in retail participation, which has lent resiliency to the price action.
One reason for this gulf between markets lies in the higher weightage of tech and AI-related stocks in the Northeast Asian bourses, vis-à-vis ASEAN indices. The latter is dominated by financials, commercial services, industrial counters, and consumer staples. This wedge is also pronounced in the US stock markets, where the tech-heavy indices have outpaced the other economy-related/ sectoral counters by a significant margin.
The other hurdle for dollar investors is weak Asian currencies, which cut into returns on local shares i.e., amounts to translation risks. For instance, Thailand has been one of the underperformers in the region, registering negative returns on local currency and USD-adjusted basis. Malaysia, on the other hand, has notched strong gains on MYR and USD basis, as investors are encouraged by the improving investment prospects.
Indian equities stand out on most counts, with the equity markets amid a broad-based rally, attracting a strong IPO pipeline, backed by a growing retail presence (record number of systematic investment plans) and registering gains on the dollar as well as local currency terms on a YTD basis (helped by a relatively stable INR amidst low implied volatility).
Encouragingly, foreigners have turned net buyers of stocks in July, as Indonesia, Malaysia, and the Philippines present attractive entry levels. Besides portfolio rebalancing, a return in focus towards domestic growth themes or a preference for defensive stocks are likely to boost broader returns in the regional markets.
The direction of foreign interest in the region’s bond markets is more varied, driven by rate differentials and macro stability buffers, especially fiscal health and currency volatility. Malaysia and the Philippines have received net inflows on a YTD basis, while Indonesia and Thailand have faced outflows.
In Indonesia, besides narrow rate differentials vs the US, concern about a departure from a longstanding policy of fiscal conservatism has impacted the view on the currency and bonds. Markets are positioned for the risk of lower fiscal prudence by the incoming administration. Thailand faces similar headwinds, as political uncertainty and proposed short-term stimulus have increased the risk of higher fiscal deficits and debt burden.
Investors are likely to eye two developments in 2H24. First, signs of a US Fed rate pivot and lower US yields are likely to shift the focus back to the regional asset markets. Second, a delay in monetary easing to mimic the US Fed will also be supportive of rate differentials, aiding inflows. We expect most regional central banks to keep rates on hold in 2H24 to preserve currency stability and provide attractive premiums.
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