Asia Ex-China Equities: A Wave of Foreign Outflows

In March 2024, Asia ex-China equity markets witnessed a significant net outflow of $906 million, marking the largest such sale since December 2022. This development, driven by a banking crisis in the West and reduced demand from developed markets, slowed business activity and triggered risk aversion among investors. This article delves into the factors contributing to this outflow and its implications for the region's equity markets.

The banking crisis in the United States and Europe, coupled with reduced demand from developed markets, led to a reversal of low-interest rates by developed economies, putting a cap on inflation. This increased the challenge for emerging markets, particularly commodity exporters like India, the Philippines, and Indonesia, which attracted investments due to increased revenue and earnings. However, the dollar's strength ultimately outweighed these factors, leading to fund outflows from the region.


Weak Asia PMIs and poor data from China also played a pivotal role in exacerbating the regional outflows. Asia's factory activity weakened in March, with soft overseas demand hurting output. This was compounded by poor data from China, including a steep slowdown in economic growth to 0.4% in the April-June quarter. These factors, coupled with banking crises in the West and reduced demand from developed markets, contributed to the regional outflows.


Election-related uncertainty in Thailand contributed to foreign investors' decision to exit the market. Thai equities saw a net outflow of $1 billion, following a $1.3 billion withdrawal in February, as investors exercised caution ahead of elections. This trend aligns with historical patterns, where Thai equities underperform up to three months before elections. The political uncertainty and potential market volatility associated with elections likely discouraged foreign investors from maintaining their exposure to the Thai market.

Despite the overall outflow, Indian, Indonesian, and Vietnamese equities drew foreign capital in March. This can be attributed to several factors, including the global shift in manufacturing supply chains driven by geopolitical tensions and the COVID-19 pandemic. Additionally, these countries' domestic demand has been resilient, with consumption patterns shifting towards higher quality, premium goods. Lastly, these countries have been implementing structural reforms and improving their business environments, making them more attractive to foreign investors.


In conclusion, the banking crisis in the West and reduced demand from developed markets led to a significant net outflow of $906 million from Asia ex-China equity markets in March 2024. This outflow was driven by risk aversion due to banking problems in the U.S. and Europe, weaker Asia PMIs, and poor data from China. While India, Indonesia, and Vietnam attracted foreign capital, the overall trend suggests a cautious approach by foreign investors towards the region. As the global economic landscape evolves, investors will need to closely monitor geopolitical developments and domestic fiscal challenges to navigate the complexities of the Asian equity markets.