Foreign Investment Shifts in Asian Emerging Markets Amid Waning Chinese Growth

Foreign investment in Asian emerging equity markets, excluding China, has surpassed inflows into China's mainland equities via Hong Kong's Stock Connect trading scheme for the first time in six years.

Over the past 12 months, net foreign inflows into "ex-China" emerging markets in Asia amounted to more than $41 billion, exceeding net inflows of approximately $33 billion into China. This data was compiled by Goldman Sachs and reflects a shift in investor optimism about Chinese growth.

The disappointing reality of China's economic rebound from stringent Covid-19 restrictions has contributed to this trend. In contrast, other economies in the region are benefiting from the relocation of supply chains and increased demand for US semiconductors.

Sunil Koul, Asia-Pacific equity strategist at Goldman Sachs, emphasized the importance of being tilted towards markets in the region that are more sensitive to US growth. He contrasted the sluggish recovery in China with strong growth in other Asian countries and rising hopes that the US can avoid a recession this year.

Investor sentiment towards China has also deteriorated, as revealed in Bank of America's Asia fund manager survey. The survey showed that a majority of the respondents, with over $650 billion in assets under management, have reduced their China exposure to underweight.

However, 86% of fund managers surveyed by BofA expect Asia-Pacific markets outside Japan to rise over the next 12 months. This is partially due to the perception of regional equities (ex-China) as undervalued. Lagging Chinese growth and increasing geopolitical risk have further fueled demand for investment products that exclude China.

Investors are focusing on two dominant themes for Asia this year: "buy India" and "buy AI-driven tech." The latter theme has led to inflows of $10 billion and $9 billion into Taiwanese and South Korean markets, respectively, as investors bet heavily on a surge in semiconductor demand driven by artificial intelligence.

Recently, foreign buying has shifted to India due to its robust growth and expectations that the country will benefit from supply chain shifts out of China, with support from the US. Foreign inflows to India have reached about $14 billion so far this year, and indicators show a bullish market with high momentum and low volatility.

Additionally, Southeast Asian emerging markets, particularly Indonesia, are also witnessing foreign inflows. A rally of more than 5% for the MSCI Asean index since July 7 has encouraged these inflows. The latest BofA survey showed that a net 12% of respondents were overweight on Indonesia, making it the favorite among Asia ex-Japan emerging markets.

While a weakening dollar has been beneficial to the region's exporters, experts caution that a dollar rally could lead to a shakeout of money from these markets. As investors closely monitor the economic landscape, emerging Asian equity markets are drawing attention and optimism for potential growth opportunities.

By fLEXI tEAM