Amid uncertainty over US rate cuts, foreign investors are retreating from emerging markets in Asia, marking the end of a five-month buying spree. Data reveals that overseas investors have sold nearly $2.2 billion worth of equities in the region’s emerging markets in April, excluding China. This significant shift marks the conclusion of the longest streak of purchases since 2017.
Taiwan has been at the forefront of these outflows this month. However, South Korea has seen a net inflow during the same period. The MSCI EM Asia Index, which had been up by as much as 4.6% year-to-date, is now on the verge of erasing its gains.
The Federal Reserve’s recent stance on interest rates has played a pivotal role in this market shift. Fed Chair Jerome Powell indicated a delay in lowering interest rates following a string of unexpectedly high inflation readings. This has sparked concerns that emerging market central banks might also postpone their rate cuts.
Further exacerbating the situation are persistently high borrowing rates, fueled by a robust US economy, coupled with rising oil prices. These factors are intensifying cost pressures, particularly due to the stronger dollar and Asia’s reliance on imported energy. Additionally, higher US rates are making Treasuries increasingly attractive as a safer investment option compared to stocks in the region.
According to insights from Morgan Stanley, active emerging market funds witnessed an outflow of $2.7 billion in March, reflecting growing speculation about the Fed delaying its easy policy. Notably, there has been a reduction in tech-heavy Taiwan and an increase in positions in countries like Saudi Arabia, Turkey, and the United Arab Emirates.
The evolving landscape of global economic policies, combined with the uncertainty surrounding US rate cuts, continues to shape the investment strategies of global funds in Asian emerging markets.
