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Intensifying geopolitical tensions and macroeconomic uncertainty have spooked overseas investors as they are pulling out funds from the Asian emerging markets. According to Bloomberg, foreign investors withdrew equity investments worth about $11 bn in October from emerging Asian equities excluding China.
Meanwhile, the average sell-off over the past three months was $27 bn. This marks the longest spell of sell-off seen after June 2022. Overseas investors pulled out over $4 bn worth of stock investments from Taiwan last month. At the same time, the sell-off in India and Korea came in at about $2 bn for the period.
Another report indicates that foreign portfolio investors have pulled out a$5 bn from Indian equities over the past two months. They withdrew $2.3 bn in September and nearly $2.6 bn in October.
A surge in US bond yields, coupled with dismal second-quarter earnings of Indian tech giants and top domestic consumer companies, prompted this sell-off. Bloomberg informs that overseas funds sold $768.4 mn of Indian shares on October 26, marking the largest single-day offloading since June 2022.
Exacerbating investor woes is the Israel-Hamas war that has fueled the crude oil prices to over $90 per barrel. So, India, being the net importer of oil, is facing the heat. According to Brendan McKenna, International Economist at Wells Fargo, “Rising oil and natural gas prices can inflict severe damage on select economies around the world, particularly G10 countries and key emerging market nations that contribute materially to global growth, such as China and India.”
Slow factory activity across emerging Asia has investors worried
Economic activity across Asia has been impacted due to suppressed global demand, and this is a key reason behind denting the confidence of overseas investors. Since September 2023, the Purchasing Managers Index (PMI) for emerging Asian economies has indicated a contraction.
Even for October, the PMI readings for Malaysia remained unchanged at 46.8, while those of Thailand and Vietnam worsened. At the same time, South Korea saw a contraction. Indonesia was the only country that witnessed an expansion in manufacturing activities. At the same time, China’s factory output returned to contraction in October, while India’s manufacturing growth slowed for the second consecutive month in the same period.
Asset managers optimistic about long-term prospects
The Israel-Hamas war has cast a cloud of uncertainty over the financial markets, but the recent sell-off by foreign investors seems more of a knee-jerk reaction. Jeffrey Kleintop, Chief Global Investment Strategist at Charles Schwab, opines, “While the human toll is unimaginable, the market’s assessment is that the latest outbreak of war in the Middle East is unlikely to be a material risk to long-term investors.”
Deloitte informs that some of the countries in the Asian emerging market have already seen significant foreign investment, indicating better prospects in the future. “Foreign direct investment in Vietnam jumped by $2.5 bn year to date in August when compared to a year earlier,” it adds. The company also suggests that Vietnam, Taiwan, and India are strongly positioned to eventually replace China in the global supply chain.
Regarding China, Pictet Asset Management holds the view that a higher risk premium has created attractive opportunities from a valuation perspective in the country. the asset manager explains, “Investors, therefore, should seek out companies with a strong balance sheet, sustainable pricing power, and attractive valuation in sectors that are aligned with Beijing’s policy priorities.”
