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Foreign buying in Asian emerging equity markets outside China has surpassed inflows to the region’s largest economy for the first time in six years, as investor optimism about Chinese growth wanes.
Over the past 12 months net foreign inflows to emerging markets in Asia “ex-China” were more than $41bn, outstripping net inflows of about $33bn into mainland Chinese equities via Hong Kong’s stock connect trading scheme, according to data compiled by Goldman Sachs.
The equivalent figures for the previous 12 months were net outflows from emerging markets of $76.6bn and net inflows into China of $42.8bn.
The shift reflects the disappointing reality of China’s rebound from harsh Covid-19 restrictions, and highlights how economies elsewhere in the region are benefiting from shifting supply chains and strong US semiconductor demand.
“When you look across the region you want to be more tilted towards markets that are more sensitive to US growth,” said Sunil Koul, Asia-Pacific equity strategist at Goldman Sachs, contrasting a sluggish recovery in China with strong growth elsewhere in the region and rising hopes that the US can avoid a recession this year.
Deteriorating investor sentiment towards China was also reflected in the latest Asia fund manager survey by Bank of America, which showed that a slight majority of about 260 respondents — with a total of more than $650bn in assets under management — had cut their China exposure to underweight.
At the same time, however, 86 per cent of fund managers surveyed by BofA expected Asia-Pacific markets outside Japan to rise over the next 12 months, partially due to “continued perception of regional equities [ex-China] as undervalued”. Lagging Chinese growth and mounting geopolitical risk have also spurred demand for investment products that exclude China.
Manishi Raychaudhuri, Asia-Pacific head of equity research for BNP Paribas, said that investors would remain “fence sitters” on China until its growth outlook improved. He described the two dominant themes for Asia this year as “buy India” and “buy AI-driven tech”.
The latter theme has spurred inflows of $10bn and $9bn to Taiwanese and South Korean markets, respectively, as investors bet heavily on an AI-driven surge in semiconductor demand.
More recently, foreign buying has shifted to India on the back of robust growth and expectations that the country would benefit from supply chains shifting out of China with US support.
“In the absence of the China growth engine coming back in full force you’ve got people rotating into India,” said Mohammed Apabhai, global markets head of Asia trading strategy at Citigroup, pointing to foreign inflows of about $14bn so far this year.
“All the indicators we’re looking at for the Indian market are extremely bullish,” he added. “Momentum is high, volatility is extremely low and the currency markets are signalling a lot of foreign inflows.”
Emerging markets in south-east Asia are also beginning to see foreign inflows, encouraged by a rally of more than 5 per cent for the MSCI Asean index since July 7. The latest BofA Survey showed a net 12 per cent of respondents were overweight Indonesia, making it the favourite among Asia ex-Japan emerging markets.
The inflows to Indonesia and other Southeast Asian markets have also been bolstered by a weakening dollar, which benefits the region’s exporters. But Citi’s Apabhai warned that “if the dollar rallies, money going into these markets will get shaken out again”.
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