Asian Stocks Attract Foreign Investors, Bypassing China

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Asian emerging equity markets outside of China have witnessed a surge in foreign buying, surpassing inflows into China for the first time in six years. Data compiled by Goldman Sachs reveals that over the past year, net foreign inflows into emerging markets in Asia “ex-China” exceeded $41 billion. This outpaced the net inflows of about $33 billion into mainland Chinese equities via Hong Kong’s stock connect trading scheme. In contrast, the previous year saw net outflows from emerging markets of $76.6 billion and net inflows into China of $42.8 billion. The shift is indicative of China’s disappointing recovery from Covid-19 restrictions, while highlighting the benefits that other regional economies are experiencing due to shifting supply chains and strong semiconductor demand from the US. As a result, investors are tilting towards markets in the region that are more sensitive to US growth.

Bank of America’s latest Asia fund manager survey also reflects deteriorating investor sentiment towards China. The survey, which involved more than 260 respondents overseeing a total of over $650 billion in assets, revealed that a slight majority had reduced their China exposure to underweight. However, despite this sentiment, 86% of fund managers expect Asia-Pacific markets outside of Japan to rise over the next year, partly due to the perception of these equities as undervalued when excluding China. Growing concerns about Chinese growth and geopolitical risk have also driven demand for investment products that exclude China.

According to Manishi Raychaudhuri, BNP Paribas’ Asia-Pacific head of equity research, investors are adopting a wait-and-see approach towards China until its growth outlook improves. Raychaudhuri identifies “buy India” and “buy AI-driven tech” as the dominant themes for Asia this year. Consequently, Taiwanese and South Korean markets have seen significant inflows of $10 billion and $9 billion, respectively, as investors bet heavily on a surge in semiconductor demand driven by AI technology. More recently, foreign buying has shifted towards India, driven by robust growth and expectations that the country will benefit from the relocation of supply chains from China with US support.

Mohammed Apabhai, Citigroup’s global markets head of Asia trading strategy, notes that in the absence of a strong Chinese growth engine, investors are rotating into India. Foreign inflows into India have already reached approximately $14 billion this year. Apabhai emphasizes the bullish indicators in the Indian market, including high momentum, extremely low volatility, and signals of foreign inflows from the currency markets.

In addition to India, emerging markets in Southeast Asia are also experiencing foreign inflows. The MSCI Asean index has seen a rally of over 5% since July 7, attracting investors. Indonesia is the favorite among Asia ex-Japan emerging markets, with a net 12% of respondents in the BofA Survey overweight on the country. The inflows into Indonesia and other Southeast Asian markets have been further supported by the weakening dollar, which benefits exporters in the region. However, Apabhai warns that if the dollar strengthens, capital may be withdrawn from these markets.